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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 001-34956
CONN’S, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
06-1672840
(I.R.S. Employer Identification Number)
2445 Technology Forest Blvd., Suite 800, The Woodlands, TX
(Address of principal executive offices)
77381
(Zip Code)
Registrant’s telephone number, including area code: (936) 230-5899
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Trading Symbol
CONN
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ☒
Indicate by check mark whether the registrant (1) 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 ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No o
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
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of July 31, 2021, was $326.6 million based on the
closing price of the registrant’s common stock as reported on the NASDAQ Global Select Market on such date.
There were 24,124,773 shares of common stock, $0.01 par value per share, outstanding on March 21, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required to be furnished pursuant to Part III of this Form 10-K is set forth in, and is hereby incorporated by reference herein from,
Conn’s definitive proxy statement for its 2022 Annual Meeting of Stockholders, to be filed by Conn’s with the Securities and Exchange Commission
(“SEC”) pursuant to Regulation 14A within 120 days after January 31, 2022.
Table of Contents
CONN’S INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2022
TABLE OF CONTENTS
Page No.
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 9C.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART I
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
[RESERVED]
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBIT INDEX
ITEM 16.
SIGNATURES
FORM 10-K SUMMARY
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This Annual Report on Form 10-K includes our trademarks such as “Conn’s,” “Conn’s HomePlus,” “YE$ YOU’RE APPROVED,” “YES Money,” “YE$
Money,” “YES Lease,” “YE$ Lease,” and our logos, which are protected under applicable intellectual property laws and are the property of Conn’s, Inc.
This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners.
Solely for convenience, trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbols, but such references are
not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to
these trademarks and trade names.
References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn’s, Inc. and, as apparent from the context, its consolidated bankruptcy-
remote variable-interest entities (“VIEs”), and its wholly-owned subsidiaries.
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PART I
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws, including but not limited to, the Private Securities
Litigation Reform Act of 1995, 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,” “predict,” “will,” “potential,” or the negative of such terms or other similar expressions are generally
forward-looking in nature and not historical facts. Such forward-looking statements are based on our current expectations. We can give no assurance that
such statements will prove to be correct, and actual results may differ materially. 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 execute periodic securitizations of future originated customer loans on
favorable terms; our ability to continue existing customer financing programs or to offer new customer financing programs; changes in the delinquency
status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in
the credit portfolio; the success of our planned opening of new stores; expansion of our e-commerce business; technological and market developments and
sales trends for our major product offerings; our ability to manage effectively the selection of our major product offerings; our ability to protect against
cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and employees; our
ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our Revolving Credit
Facility (as defined herein); proceeds from accessing debt or equity markets; the effects of epidemics or pandemics, including the COVID-19 pandemic;
and other risks detailed in Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K and other reports filed with the SEC. If one or more of these
or other risks or uncertainties materialize (or the consequences of such a development changes), or should our underlying assumptions prove incorrect,
actual outcomes may vary materially from those reflected in our forward-looking statements. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We disclaim any intention or obligation to update publicly or revise such
statements, whether as a result of new information, future events or otherwise, or to provide periodic updates or guidance. All forward-looking statements
attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.
ITEM 1. BUSINESS.
Company Overview
Conn’s, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its subsidiaries.
References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn’s, Inc. and, as apparent from the context, its subsidiaries. Conn’s is a
leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to proprietary credit
solutions for its core consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product
offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range
of price points. Our credit offering provides financing solutions to a large, under-served population of consumers who typically have limited credit
alternatives. We provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable
monthly payment options, next day delivery and installation in the majority of our markets and product repair service. We believe our large, attractively
merchandised stores and credit solutions offer a distinctive value proposition compared to other retailers that target our core customer demographic.
Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
Operating Segments
We operate two reportable segments: retail and credit. Information regarding segment performance is included in Part II, Item 7., Management’s Discussion
and Analysis of Financial Condition and Results of Operations, and Part II, Item 8. in Note 14, Segment Information, of the Consolidated Financial
Statements of this Annual Report on Form 10-K.
Retail Segment. We began as a small plumbing and heating business in 1890 and started selling home appliances to the retail market in 1937 through one
store located in Beaumont, Texas. As of January 31, 2022, we operated 158 retail stores located in 15 states. Our stores typically range in size from 25,000
to 50,000 square feet and are predominantly located in areas densely populated by our core customers.
We utilize a merchandising strategy that offers a wide range of quality, name brand and private brand products across a broad spectrum of price points. This
wide selection allows us to offer products and price points that appeal to the majority of our core consumers. Our primary retail product categories include:
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•
Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both lay flat
mattresses and mattress in a box offerings. We offer brands such as Corinthian, Catnapper, Tempur-Pedic, Simmons Beautyrest and Nectar.
• Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges. We offer brands such as Samsung, LG, General
Electric, and Frigidaire.
•
Consumer electronics, including LED, OLED, QLED, 4K Ultra HD, 8K televisions, gaming products, next generation video game consoles and
home theater and portable audio equipment. We offer brands such as Samsung, LG, Sony, Bose and Microsoft Xbox.
• Home office, including computers, tablets, monitors and accessories. We offer brands such as HP, Apple, and Microsoft.
We strive to ensure that our customers’ shopping experience at Conn’s is equal to, or exceeds, their experience with other providers of durable consumer
goods targeting our core customer demographic. We offer a high level of customer service through our commissioned and trained sales force, next day
delivery and installation in the majority of our markets and product repair or replacement services for most items sold in our stores. We also sell and offer
our services through our website. Flexible payment alternatives offered through our proprietary in-house credit programs and third-party financing
alternatives provide our customers the ability to make aspirational purchases. We believe our extensive brand and product selection, competitive pricing,
financing alternatives and supporting services, combined with our customer service-focused store, delivery and service associates make us an attractive
alternative to appliance and electronics superstores, department stores and other national, regional, local and internet retailers. We believe our attractive
credit programs generate strong customer loyalty and repeat business.
Credit Segment. Our in-house consumer credit programs are an integral part of our business and are a major driver of customer loyalty. We believe our in-
house credit programs are a significant competitive advantage that we have developed over our 50-plus years in providing credit. We have developed
proprietary underwriting models that provide standardized credit decisions, including down payment, limit amounts and credit terms, based on customer
risk and income level. We use our proprietary auto-decision algorithms as well as in-depth evaluations of creditworthiness performed by qualified in-house
credit underwriters to complete all credit decisions. In order to improve the speed and consistency of underwriting decisions, we continually review our
auto-decision algorithms. Additionally, we provide access to alternative financing options to a wider range of consumers through our relationship with
third-party payment solution providers. These third parties manage their own respective underwriting decisions and are responsible for their own
collections. Our in-house credit programs and access to third-party payment solutions allows us to provide credit to a large and under-served customer base
and differentiates us from our competitors that do not offer similar programs.
Our goal is to provide every customer that enters our stores or applies for credit on our website an affordable monthly payment option. Currently, we make
the following payment options available to our customers based on a review of their credit worthiness:
•
•
•
For customers with credit scores that are typically above 650, we offer special no-interest or lower interest option financing programs on select
products through a Conn’s branded revolving credit card from Synchrony or we may offer an in-house financing program;
For customers with credit scores that are typically between 550 and 650, we offer our proprietary in-house financing program, which is a fixed
term, fixed payment installment and consumer loan contract and may also include special no-interest or lower interest options; and
For customers that do not qualify for our credit programs, we offer a lease-to-own payment option through an arrangement with our third-party
lease-to-own providers.
We continuously evaluate alternative financing programs that may give us the ability to provide more customers with the ability to purchase the products
and services we offer.
Our retail business and credit business operate independently from each other. The retail segment is not involved in credit approval decisions or collections.
Decisions to extend consumer credit to our retail customers under our in-house programs are made by our internal credit underwriting department. In
addition to underwriting, we manage the collection process of our in-house consumer credit portfolio. Sales financed through our in-house credit programs
are secured by the products purchased, which we believe gives us a distinct advantage over other creditors when pursuing collections. The products we sell
and finance are typically necessities for the home.
We mitigate credit risk by originating to a significant number of customers who have purchased from us in the past. These repeat customers have
historically exhibited a lower probability of default than new customers. For fiscal year 2022 and 2021, 43% and 50%, respectively, of our originations
were to repeat customers who financed a subsequent purchase through our in-
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house credit programs more than five months after financing an initial purchase through our in-house credit programs. As of January 31, 2022 and 2021,
51% and 60%, respectively, of balances due under our in-house credit programs were from repeat customers who have previously financed with us.
Industry and Market Overview
The products we sell are typically considered home necessities, used by our customers in their everyday lives. Many factors influence sales, including
consumer confidence, economic conditions, and household formations. We also benefit from the introduction of new products and technologies driving
consumers to upgrade existing appliances, electronics and home office products.
As of January 31, 2022, we operated 73 of our 158 stores in Texas. According to the U.S. Department of Commerce’s Bureau of Economic Analysis (the
“Bureau of Economic Analysis”), Texas was the second largest state by nominal GDP in 2021. In addition, from calendar year 2016 to 2021, Texas
experienced population growth of 5.8% compared to the United States (“U.S.”) population growth of 2.7% over the same period.
Furniture and Mattress. According to the Bureau of Economic Analysis, personal consumption expenditures for household furniture and mattresses were
$181.0 billion for calendar year 2021, an increase of 13.6% from $159.4 billion in 2020. The household furniture and mattress market is highly fragmented
with sales coming from manufacturer-owned stores, independent dealers, furniture centers, specialty sleep product stores, national and local chains, mass
market retailers, department stores, internet retailers, and, to a lesser extent, home improvement centers, decorator showrooms, wholesale clubs and catalog
retailers. For fiscal year 2022, we generated 34.1% of total product sales from the sale of furniture and mattresses. The furniture and mattress category
generated our highest individual product category gross margin. Given our ability to provide customer financing and next day delivery, we believe that we
have strong competitive advantages and significant growth opportunities in this market and expect to continue to grow the balance of sale of our furniture
and mattress product category. Product design, innovation and technological advancements have been key drivers of sales in this market.
Home Appliance. According to the Bureau of Economic Analysis, personal consumption expenditures for home appliances were $74.9 billion for calendar
year 2021, an increase of 13.7% from $65.9 billion in 2020. Major household appliances, such as refrigerators and washer/dryers, accounted for 84.0% of
this total at $63 billion in 2021. For fiscal year 2022, we generated 41.5% of total product sales from the sale of home appliances. The retail appliance
market is large and concentrated among a few major dealers, with sales coming primarily from home improvement centers, large appliance and electronics
superstores, national chains, warehouse clubs, department stores, regional chains, local dealers/single-store operators, manufacturer-direct websites and
internet retailers.
Key drivers of sales in the appliance market include product design and innovation, brand and quality. In addition, there has been an increase in the demand
for appliances during the COVID-19 pandemic as a result of more in home lifestyles. We carry products with features that include large-capacity, high-
efficiency laundry appliances, refrigerator design innovation, technological advancements such as smart home connectivity and variations on these features
from leading brands.
Consumer Electronics and Home Office. According to the Bureau of Economic Analysis, electronics spending was $337.1 billion for calendar year 2021,
an increase of 13.2% from $297.8 billion for calendar year 2020. Televisions accounted for $43.7 billion of the overall personal consumption expenditures,
versus $38.3 billion in the prior year. Personal computers and peripheral equipment accounted for $74.7 billion of the overall expenditures, compared to
$66.3 billion in the prior year. For fiscal year 2022, we generated 15.9% of total product sales from the sale of consumer electronics and 5.5% of total
product sales from the sale of home office products. The electronics market is highly fragmented with sales coming from large appliance and electronics
superstores, national chains, warehouse clubs, regional chains, local dealers/single-store operators, manufacturer-direct websites, manufacturer-direct
stores, consumer electronics departments of selected department and discount stores and internet retailers.
Technological advancements and the introduction of new products largely drive demand in the electronics market. Historically, industry growth has been
fueled primarily by the introduction of products that incorporate new technologies and advances in existing technologies, including OLED, QLED, 4K
Ultra HD, 8K televisions, gaming products, video game consoles, home theater and computers. New technologies offer better clarity and quality of video,
increased computer processing speed, availability of additional 4K content and other significant advantages.
Consumer Credit. Based on data from the Federal Reserve System, estimated total consumer credit outstanding, which primarily excludes loans secured by
real estate, was $4.4 trillion as of December 31, 2021, an increase of 4.8% from $4.2 trillion at December 31, 2020. Consumers obtain credit from banks,
credit unions, finance companies and non-financial businesses that offer credit, including retailers. The credit obtained takes many forms, including
revolving (e.g., credit cards) and fixed-term (e.g., automobile loans), and at times is secured by the products being purchased.
Competition. Our competitive strength is based on offering financing options, including our proprietary in-house credit programs, to our core customers,
enhanced customer service and customer shopping experience through our unique sales force
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training and product knowledge, next day delivery capabilities, low payment guarantee, and product repair service. Currently, we compete against a diverse
group of retailers, including national mass merchants such as Wal-Mart, Target, Sam’s Club, Sears and Costco, specialized national retailers such as Best
Buy, Ashley Furniture and Mattress Firm, home improvement stores such as Lowe’s and Home Depot, and locally-owned regional or independent retail
specialty stores that sell furniture and mattresses, home appliances, and consumer electronics similar, and often identical, to those items we sell. We also
compete with internet retailers such as Amazon, Wayfair and manufacturer-direct websites. In addition, there are few barriers to entry into our current and
contemplated markets, and new competitors may enter our current or future markets at any time. Certain of our competitors are beginning to offer third
party financing or provide other forms of credit, which compete with our in-house credit programs for credit-constrained consumers. We also compete
against companies offering credit-constrained consumers products for the home similar to those offered by us under weekly or monthly lease-to-own
payment options. Competitors include Aaron’s and Rent-A-Center, as well as many smaller, independent companies.
Customers
We have a well-defined core consumer base that is comprised of working individuals who typically earn between $25,000 to $60,000 in annual income,
live in densely populated and mature neighborhoods, and typically shop at our stores to replace older household goods with newer items. Our product line
is comprised of durable home necessities which enables us to appeal to a diverse range of cultural and socioeconomic backgrounds and to operate stores in
diverse markets. No single customer accounts for more than 10% of our total revenues and we do not have a significant concentration of sales with any
individual customer. Therefore, the loss of any one customer would not have a material impact on our business.
Seasonality
Our business is seasonal which typically means that a higher portion of sales and operating profit are realized during the fourth quarter due primarily to the
holiday selling season. In addition, during the first quarter, our portfolio performance benefits from the timing of personal income tax refunds received by
our customers, which typically results in higher cash collection rates.
Merchandising
Vendors. We purchase products from a wide range of manufacturers and distributors. Our agreements with these manufacturers and distributors typically
cover a one-year time period and are renewable at the option of the parties. Similar to other specialty retailers, we purchase a significant portion of our total
inventory from a limited number of vendors. During fiscal year 2022, 73.3% of our total inventory purchases were from six vendors, including 31.5%,
21.1% and 11.0% of our total inventory purchases from Samsung, LG and GE, respectively. The loss of any one or more of these key vendors or our failure
to establish and maintain relationships with these and other vendors could have a material adverse effect on our results of operations and financial
condition. During the year ended January 31, 2022, the COVID-19 pandemic caused industry-wide shortages of merchandise due to supply chain
disruptions that negatively impacted our in-stock position. However, our relationship with our vendors allowed us to maintain a competitive in-stock
position.
Merchandise. We focus on providing a selection of quality merchandise at a wide range of price points to appeal to a broad range of potential customers.
We primarily sell brand name merchandise with manufacturer’s warranties. Our established relationships with furniture and mattress, home appliance and
consumer electronics vendors give us purchasing power that allows us to offer name brand appliances and electronics at prices that are comparable with
national retailers and provides us a competitive selling advantage over smaller independent retailers. Additionally, we provide next-day delivery to a
majority of our customers, giving us a competitive advantage over smaller furniture retailers in the marketplace today.
Credit Operations
General. We sell our products by offering our customers financing through our proprietary in-house credit programs, the use of third-party financing, and
by taking cash or credit card payments. For the fiscal year 2022, approximately 51.0% of purchases were financed through our proprietary in-house credit
programs, approximately 28.1% of purchases were financed through the use of third-party financing, and approximately 20.9% of purchases were made
with cash or credit card.
Underwriting. Decisions to extend credit to our retail customers are made by our internal credit underwriting department, which is separate and distinct
from our other operations, including credit monitoring and collections and retail sales. In addition to auto-decision algorithms, we employ a team of credit
underwriting personnel of approximately 50 individuals to make credit granting decisions using our proprietary underwriting process. Our underwriting
process considers one or more of the following elements: credit bureau information; income and address verification; current income and debt levels; a
review of the customer’s previous credit history with us; and the particular products being purchased. Our underwriting models determine the finance
terms, including down payment, limit amounts and credit terms. During fiscal year 2022, of the credit applications received, 72.7% were auto decisioned.
The remaining credit decisions were based on the evaluation of the customer’s creditworthiness in combination with requiring additional documentation
from the applicant. These credit applicants may have past credit problems, lack credit history or be potential fraudulent applications, requiring us to use
stricter underwriting criteria. The additional requirements include verification of employment and recent work history, heightened ID
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verification and potentially a required down payment. Our underwriting employees are trained and monitored to ensure they follow our methodology in
approving credit.
Part of our ability to control delinquency and net charge-off is based on the total approval amount, the finance product offering, i.e. interest free period or
down payment amounts, the maximum contract terms we allow and the purchase money security interest that we obtain in the product financed, which
reduce our credit risk and increase our customers’ ability and willingness to meet their future obligations. We require the customer to provide proof of
property insurance coverage on all purchases financed through our credit offerings to offset potential losses relating to theft or damage of the product
financed. We do not require customers to purchase property insurance from us if they have or acquire such insurance from another third-party.
Credit monitoring and collections. Our collection activities involve a combination of efforts that take place primarily in our San Antonio, Texas and
Tempe, Arizona, collection centers. As of January 31, 2022, we employed approximately 315 full and part time individual collectors and support personnel
who service our active customer credit portfolio. We also utilize collection agencies to service portions of our charged-off portfolio, which provide
approximately 150 additional agents. Our in-house, credit-financed sales are secured by the products purchased, which we believe gives us a distinct
advantage over other creditors when pursuing collections, especially given that many of the products we finance are generally necessities for the home. We
utilize a credit collection strategy that includes telephone calls and messages, internal collectors that contact borrowers, collection letters, e-mails, text
messages and third-party legal services that process claims and attend bankruptcy hearings and voluntary repossession. Our employees are trained to follow
our methodology in collecting our accounts and charging off any uncollectible accounts based on pre-determined aging criteria, depending on their area of
responsibility. All collection personnel are required to complete classroom training, which includes negotiation techniques and credit policy training to
ensure customer retention and compliance with debt collection regulations. Post-graduation, the collection trainees undergo skill assessment training,
coaching and call monitoring within their respective departments. Our personnel are required to complete regular refresher training and testing.
We closely monitor the credit portfolio to identify delinquent accounts early and dedicate resources to contact customers concerning past due accounts. We
believe that our unique underwriting models, secured interest in the products financed, required down payments and credit limits, local presence, ability to
work with customers relative to their product and service needs, and our flexible financing alternatives help mitigate the loss experience on our portfolio.
Customers can make payments through our web portal, over the phone, by ACH, third-party bill pay arrangements, by mail to our lock box or in-person at
our store locations. During fiscal year 2022, we received 19.8% of the payments on credit accounts in our store locations, which helps us maintain a
relationship with the customer that keeps losses lower while encouraging repeat purchases. We may extend or “re-age” a portion of our delinquent customer
accounts as a part of our normal collection procedures to protect our investment. Generally, extensions are granted to customers who have experienced a
financial difficulty (such as the temporary loss of employment), which is subsequently resolved and when the customer indicates a willingness and ability
to resume making monthly payments. These re-ages involve modifying the payment terms to defer a portion of the cash payments currently required of the
debtor to help the debtor improve his or her financial condition and eventually be able to pay the account balance. Our re-aging of customer accounts does
not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly contractual payments. We
typically charge the customer an extension fee, where permitted, which approximates the interest owed for the time period the contract was past due. Our
re-age programs consist of extensions and two payment updates, which include unilateral extensions to customers who make two full payments in three
calendar months in certain states. During the second quarter of fiscal year 2021, we changed our re-age policy to increase the number of days required for a
customer to qualify for a unilateral re-age. Re-ages are not granted to debtors who demonstrate a lack of intent or ability to service the obligation or have
reached our limits for account re-aging. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the
account, which does not change the total principal amount due from the customer but does reduce the monthly contractual payments and extends the term.
Under these options the customer must demonstrate a willingness and ability to resume making contractual monthly payments.
We deem an account to be uncollectible and charge it off when the account is more than 209 days past due at the end of a month. Our credit and accounting
staff consistently monitor trends in charge-offs by examining the various characteristics of the charge-offs, including by market, product type, customer
credit and income information, down payment amounts and other identifying information. We track our charge-offs both gross, before recoveries, and net,
after recoveries. We periodically adjust our credit granting, collection and charge-off policies based on this information. It is to our advantage to manage
the portfolio to balance the combined servicing costs and net losses on the credit portfolio with the benefit of repeat retail sales. We may incur higher
servicing costs in order to build customer relationships that may result in future retail sales. Collection activity continues after an account is charged off by
both internal staff and third-party collection agencies who are typically paid on a contingency basis.
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Store Operations
Stores. We operate retail stores in 15 states. The following table summarizes the number of stores in operation at January 31, 2022 in each of our markets:
Geographic Location
Alabama
Arizona
Colorado
Florida
Georgia
Louisiana
Mississippi
Nevada
New Mexico
North Carolina
Oklahoma
South Carolina
Tennessee
Texas
Virginia
Store totals
Distribution and Service Centers and Cross-dock Facilities (excluding cross-docks
within stores)
Corporate Offices
Total
Number of
Locations
Retail Square
Feet
Other
Square Feet
5
11
7
11
1
10
2
3
4
11
4
4
6
73
6
158
21
5
184
195,548
384,283
243,383
359,010
40,935
407,899
73,780
118,511
138,285
419,584
135,215
140,145
214,116
2,621,137
207,538
5,699,369
—
—
5,699,369
33,830
73,936
47,623
80,011
8,446
98,227
13,892
26,072
23,325
83,889
27,740
21,516
46,455
407,833
43,235
1,036,030
3,624,711
159,073
4,819,814
Our stores have an average selling space of approximately 36,000 square feet, plus a storage area for fast-moving and smaller products that customers
prefer to carry out rather than wait for in-home delivery. Fourteen of our retail stores also contain cross-dock facilities.
We continuously evaluate our existing and potential sites to position our stores in desirable locations and relocate stores that are not properly positioned.
We typically lease rather than purchase our stores, distribution and service centers and cross-dock facilities to retain the flexibility of managing our
financial commitment to a location if we later decide that a store or market is performing below our standards or the market would be better served by a
relocation. As of January 31, 2022, we leased almost all of our store, distribution and service center and cross-dock locations.
Personnel and compensation. We staff a typical store with a store manager, an assistant manager, an operations manager, an average of 14 sales personnel
and other support staff, including cashiers and porters based on store size and location. Managers have an average tenure with us of approximately four
years and typically have prior sales floor experience. In addition to store managers, we have 20 district managers.
We compensate the majority of our sales associates on a straight commission arrangement. Store managers and assistant store managers receive a salary
and are eligible for a bonus. We believe that our store compensation plans, which are primarily tied to sales, generally help us attract and motivate
employees.
Advertising
We design our marketing programs to increase awareness of our brand, grow consideration, drive traffic demand to our website and stores which all
ultimately lead to growing sales and building customer loyalty. We employ a multi-touch media approach utilizing direct mail, television, newspaper,
digital channels, radio and out-of-home targeted advertising. Our promotional programs include the use of free next day delivery and free product
promotions, in conjunction with product discounts and various no-interest option financing offers.
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E-Commerce
We are focused on expanding the capabilities of our website to generate customer traffic for both our digital and physical stores. Our website provides new
and existing customers with the ability to purchase substantially all of our product offerings, view prices, apply for credit and make payments on their
credit accounts. We update our website regularly to reflect new products, product availability and current promotional offers. Our website is a significant
component of our advertising strategy. We believe our website represents a possible source for future sales and growth in our credit collections. We are
focused on improving the customer experience by making it easier for customers to apply for and be approved for credit on-line. We offer credit-qualified
customers the ability to complete an entire purchase transaction financed online through our proprietary in-house credit programs. Our website averaged
approximately 74,000 credit applications per month during fiscal year 2022. This compares to average monthly website applications of approximately
68,000 and 65,000 during fiscal year 2021 and 2020, respectively.
The website is supported by a call center, allowing us to better assist customers with their credit and product needs.
Distribution and Inventory Management
We currently operate 11 regional distribution centers, which are located in Houston, San Antonio, Dallas, El Paso, and McAllen, Texas; Port Allen,
Louisiana; Phoenix, Arizona; Denver, Colorado; Charlotte, North Carolina; Nashville, Tennessee; and Lakeland, Florida, one service center located in
Houston, Texas, 9 smaller cross-dock facilities and 14 stores with cross-dock facilities. This enables us to deliver products to our customers quickly,
reduces inventory requirements at the individual stores, and facilitates regional inventory and accounting controls.
In our retail stores, we maintain an inventory of certain fast-moving items and products that the customer is likely to carry out of the store. Our inventory
management system and the use of scanning technology in our distribution centers allow us to determine, on a real-time basis, the location of any product
we sell. If we do not have a product at the desired retail store at the time of sale, we can typically provide it through one of our distribution centers on a
next day basis.
We primarily use third-party providers to move products from distribution centers to stores and between markets to meet customer needs. We outsource our
in-home deliveries to third-party providers and, for most purchases, we offer next day delivery to our customers. These third-party providers use a fleet of
home delivery vehicles that enables a highly trained staff of delivery and installation specialists to quickly complete the sales process and provide a high-
quality customer experience. We also may receive a delivery fee based on the products sold and the services needed to complete the delivery.
Product Support Services
Next-day delivery and installation. We provide next-day delivery and installation services in most of the markets in which we operate. We believe next-
day delivery of our goods is a highly valued service to our customers.
Credit insurance. Acting as licensed agents for third-party insurance companies, we offer property, life, disability and involuntary unemployment credit
insurance, which we collectively refer to as credit insurance, at all of our stores on sales financed through our in-house credit programs. These insurance
products protect the customer’s purchase by covering their payments on their credit account if covered events occur. Property insurance purchased through
us can be canceled at any time with proof of alternative coverage. We receive sales commissions from the third-party insurance companies at the time we
sell the coverage, and we may receive retrospective commissions, which are additional commissions paid by the insurance carrier if insurance claims are
less than earned premiums.
We require proof of property insurance on all purchases financed through our in-house credit offerings; however, we do not require that customers purchase
this insurance from us if they have or acquire such insurance from another third-party provider. Premiums charged on the credit products we sell are
regulated and vary by state.
Product repair service. We believe that providing product repair and replacement services is an important differentiation and reinforces customer loyalty.
We provide in-home and shop repair services for most of the products we sell and primarily service products purchased from us. Customer repair needs are
primarily serviced with an employee-based technician workforce. We believe this staffing model allows us to control the post-sale customer service
experience.
Repair service agreements. Customers may purchase repair service agreements that we sell for third-party insurers at the time a product is purchased.
These agreements broaden and extend the period of covered manufacturer warranty service for up to four years from the date of purchase, depending on the
product, and protect the customer against repair costs. Customers may finance the cost of the agreements along with the purchase price of the associated
product.
We have contracts with third-party insurers that issue the initial repair service agreements to cover the costs of repairs performed under these agreements.
The initial service agreement is between the customer and the third-party insurance company, and, through our agreements with the third-party insurance
company, we provide service when it is needed under each agreement sold. We receive a commission on the sale of the contract and we may receive
retrospective commissions,
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which are additional commissions paid by the insurance carrier over time if the cost of repair claims are less than earned premiums. Additionally, we bill
the insurance company for the cost of the service work that we perform.
Human Capital Management
We employ approximately 4,000 full-time employees and 120 part-time employees in the U.S. across 15 states, all of whom are expected to be guided by
our values and by an underlying set of ethical principles. Incorporated into our Code of Business Conduct & Ethics, our values and principles define our
culture and strengthen our workforce. We strive to demonstrate to our customers, shareholders, business partners, communities and employees that we are
worthy of their trust and continually strive to enhance our brand reputation. We invest in employees at all levels who are expected to integrate our values
and principles in all that we do.
Our Board of Directors oversees human capital management activities (including assessing the effectiveness of employee programs and advising
management with regard to the quality of the workforce to carry out our strategic goals and overall human resource strategies), other committees of the
Board of Directors also have responsibilities that impact our human capital management as outlined in their respective charters. Our Human Resources
function has management responsibility for advising and assisting the business on human resource matters and executing our overall human capital
management strategies.
We are committed to fostering work environments that value diversity and inclusion. A variety of perspectives enriches our culture, leads to innovative
solutions for our business and enables us to better meet the needs of a diverse customer base and reflects the communities we serve. Our aim is to develop
inclusive leaders and an inclusive culture, while also recruiting, developing, mentoring, training, and retaining a diverse workforce.
We have a Diversity and Inclusion function which is responsible for strategic management and planning for diversity and inclusion within the Company, as
well as enhancing our understanding, providing training and development, and partnering with and assisting all of us to be accountable. During the year,
our Diversity and Inclusion function drove a number of initiatives to enhance our focus on diversity and inclusion and raise our awareness. We have a
number of these and related initiatives disclosed on our website at www.conns.com/esg. Information contained on our website is not part of this Annual
Report on Form 10-K.
We strive to engage and retain our employees throughout the employment life-cycle with effective recruiting and onboarding; competitive pay, benefits and
other rewards; mandatory and optional programs for professional development and career advancement; compliance training; and a safe, healthy and
respectful workplace.
In response to the COVID-19 pandemic, we quickly implemented safety and health standards and protocols for our employees while continuing to offer a
safe environment as an essential service to our customers. Many of our employees in our corporate offices have been working from home from time to time
since March 2020. Our store locations are provided with personal protective equipment, other equipment and enhanced cleaning supplies, and are required
to adhere to appropriate protocols for social distancing, limiting density, reporting and documenting exposures and wearing masks at all times, all as
recommended by the Centers for Disease Control or mandated by local regulations.
We maintain an Ethics Hotline that is available to all employees to report (anonymously if desired) any matter of concern. Communications to the hotline
are routed to appropriate functions (whether Human Resources, Legal or other departments) for investigation and resolution. In addition, any shareholder or
other interested party may send communications to the Board of Directors, either individually or as a group.
Regulation
The extension of credit to consumers is a highly regulated area of our business. Numerous federal and state laws impose disclosure and other requirements
and limitations on the origination, servicing and enforcement of retail installment sale accounts and consumer loans as well as our acts and practices in
connection with these activities. Applicable federal laws include, but are not limited to, the Truth in Lending Act (“TILA”), the Equal Credit Opportunity
Act (“ECOA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt Collection Practices Act (“FDCPA”), the Telephone Consumer Protection Act
(“TCPA”), the Gramm-Leach-Bliley Act (“GLBA”), the Electronic Fund Transfer Act (“EFTA”), the Military Lending Act (“MLA”), the Servicemembers
Civil Relief Act (“SCRA”) and the implementing regulations of the foregoing statutes. The Federal Trade Commission (“FTC”) has broad consumer
protection enforcement authority under Section 5 of the Federal Trade Commission Act (“FTCA”), which prohibits “unfair or deceptive acts or practices in
or affecting commerce.” The FTC also can enforce specific consumer protection statutes, such as the ECOA, FCRA, FDCPA, TCPA, GLBA, EFTA, MLA,
SCRA and TILA, and has authority to issue regulations in respect of certain of these.
The Consumer Financial Protection Bureau (“CFPB”) was created in 2010 upon the enactment of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank Act”). The CFPB has rulemaking and enforcement authority over nonbanks engaging in offering or providing a consumer
financial product or service (such as extending credit and servicing loans) as well as any affiliate of such “covered person” that acts as a “service provider”
to such covered person. The federal
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consumer financial laws over which the CFPB has enforcement and rulemaking authority include TILA, ECOA, FCRA, FDCPA, and GLBA as well as
authority under Title X of the Dodd-Frank Act to prohibit “unfair, deceptive or abusive acts or practices” (“UDAAP”) in connection with consumer
financial products and services. The scope of UDAAP is broad and often uncertain, but the CFPB has been active in enforcing UDAAP claims. The CFPB
has broad power to impose civil monetary penalties, restitution, and other corrective action under the various laws described above and, for this reason,
poses a significant regulatory risk to the origination, servicing, and collection of our retail installment contracts and consumer loans.
In addition to its rulemaking and enforcement authority described in the preceding paragraph, the CFPB also has supervisory and examination authority
over mortgage lending, payday lending, and private student lending, as well as “larger participants” in other markets for consumer financial products or
services (including debt collection), and any covered person if the CFPB has “reasonable cause to determine” that such covered person is engaging, or has
engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services, whether based on
consumer complaints or “information from other sources.” Although we are not automatically subject to CFPB supervisory or examination authority based
on the foregoing categories, the CFPB has authority to investigate and take enforcement action against us with respect to any alleged violation by us of a
federal consumer financial law over which the CFPB has jurisdiction, including the prohibition on UDAAP. The mere receipt by us of a “civil investigative
demand” from the CFPB requiring production of documents, written responses, reports or oral testimony could result in required public disclosure, adverse
publicity, and substantial cost to us regardless of the outcome. The CFPB may become more active in its investigations and enforcement due to changes in
the political landscape.
Regulatory rulemaking by the CFPB could adversely affect origination, servicing, and collection of our retail installment sale and consumer loan products
by making it more difficult and costly for us to offer, service or collect these products. In addition, CFPB rulemaking could make it possible, or easier for
our customers to bring class action claims against us, or prohibit or limit the use of arbitration clauses and class action waivers, both of which we include in
our installment contracts and loan agreements.
In Texas, Oklahoma, Louisiana and Tennessee, Conn Credit Corporation, Inc., an affiliate of Conn Appliances, Inc., offers a consumer loan product to our
customers. In conjunction with our direct loan program, Conn Credit Corporation, Inc., Conn Appliances, Inc., and Conn Credit I, LP, each hold consumer
lender licenses as required by their respective state laws. For customers of most stores located outside of Texas, Oklahoma, Louisiana, and Tennessee, Conn
Appliances, Inc. offers a retail installment sale contract.
State laws impose disclosure and other requirements and limitations on retail installment sale contracts and consumer loan agreements and impose
maximum amounts of finance charges and interest, as well as regulation of other fees and charges, together with restrictions on credit terms, collection and
enforcement and other aspects of extending and collecting consumer credit. State consumer finance laws vary from state to state. The originating and
servicing of consumer loans typically requires state licensing which entails heightened supervision, examination, and other requirements which may not be
applicable to retail sellers extending credit under retail installment sale contracts. Pursuant to the Dodd-Frank Act, state attorneys general and designated
state consumer finance regulatory agencies may enforce specified federal consumer finance laws and impose penalties and remedies for their violation. We
routinely review our contracts and procedures to ensure compliance with applicable consumer credit laws. Failure on our part to comply with applicable
laws could expose us to consumer litigation and government enforcement action, possibly resulting in substantial penalties and claims for damages and, in
certain circumstances, may subject us to injunctions, require us to refund finance charges already paid, forgo finance charges not yet paid under credit
accounts, change our credit extension, servicing, collection, and marketing practices or a combination of the foregoing. We believe that we are in
substantial compliance with all applicable federal and state consumer credit and collection laws.
Our sale of credit insurance products, insured by an unaffiliated third-party insurance provider, that include property, life, disability and involuntary
unemployment credit insurance is also highly regulated. These products are only offered with a retail installment sales or loan contract agreement purchase.
State laws currently impose disclosure obligations and other restrictions with respect to our sales of these products, impose limitations on the amount of
premiums that we may charge and require licensing of certain of our employees and operating entities. State laws with respect to these products vary from
state to state. Failure to comply with these laws could expose us to consumer litigation and government enforcement action, possibly resulting in
substantial penalties and claims for damages, and in certain circumstances, may subject us to injunctions or require us to refund premiums or change our
policies and procedures with respect to these products and the marketing of these products or a combination of the foregoing. We believe that we are in
substantial compliance with all applicable federal and state consumer credit and collection laws.
In conjunction with the sale of merchandise, we offer our customers the opportunity to purchase repair service agreements on specified products. These
contracts are entered into between the customer and an unaffiliated third-party service provider. The contracts enable the customer to obtain repair and/or
replacement of certain eligible products in the event of specified failures as described in the terms and conditions of the contract. The service provider,
which is financially and legally obligated to
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perform under these contracts, has entered into a contract with our affiliate to administer the contracts. We post descriptions of these contracts and links to
the contract terms on our website. Service contracts require payment of a segregated fee which may be paid by cash, check or financed by customers
entering into retail installment sale contracts with Conn Appliances, Inc. or loan agreements with Conn Credit Corporation, Inc. The federal Magnusson-
Moss Warranty Act governs written warranties and service contracts. For service contracts entered into with Texas customers, state law requires registration
of the service provider and Conn Appliances, Inc. as an administrator, a reimbursement insurance policy and other requirements on the service provider,
responsibilities on service contract sellers, record-keeping requirements, restrictions on the sale or marketing of service contracts, required contract terms
and disclosures, and cancellation requirements, among other requirements and prohibitions. Other states vary in their regulation of these contracts.
Violation of these laws can result in injunctive relief, civil penalties, and/or other remedies. We believe that we are in substantial compliance with all
applicable federal and state consumer credit and collection laws.
Tradenames and Trademarks
We have registered the trademarks “Conn’s,” “Conn’s HomePlus,” “YE$ YOU’RE APPROVED,” “YES Money,” “YE$ Money,” “YES Lease,” “YE$
Lease,” and our logos, which are protected under applicable intellectual property laws and are the property of Conn’s, Inc. Our trademark registrations
generally last for ten-year periods and are renewed prior to expiration for additional ten-year periods.
Available Information
We are subject to reporting requirements of the Securities and Exchange Act of 1934, as amended (“Exchange Act”), and the rules and regulations
promulgated thereunder. The Exchange Act requires us to file reports, proxy and other information statements and other information with the SEC. You
may also obtain these materials electronically by accessing the SEC’s website at www.sec.gov.
The Board of Directors of the Company (“Board of Directors”) has adopted a code of business conduct and ethics for our employees, code of ethics for our
Chief Executive Officer and senior financial professionals and a code of business conduct and ethics for our Board of Directors. A copy of these codes are
published on our website at www.conns.com under “Investor Relations — Corporate Governance.” We intend to make all required disclosures concerning
any amendments to, or waivers from, these codes on our website. In addition, we make available, free of charge on our website, our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. You may review
these documents, under the heading “Investor Relations — SEC Filings,” by accessing our website at www.conns.com.
We make available on our website at www.conns.com under “Investor Relations — Asset Backed Securities” updated monthly reports to the holders of our
asset-backed notes. This information reflects the performance of the securitized portfolio only, in contrast to the financial statements contained herein,
which reflect the performance of all of the Company’s outstanding receivables, including those originated subsequent to those included in the securitized
portfolio.
Our website and the information contained on our website is not incorporated in this Annual Report on Form 10-K or any other document filed with the
SEC.
ITEM 1A. RISK FACTORS.
You should consider carefully the risks described below and other information presented in this Form 10-K, including Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this Form 10-K, as
well as information provided in other reports, registration statements and materials that we file with the SEC and the other information incorporated by
reference in this Form 10-K. If any of the risks described below or elsewhere in this Form 10-K were to materialize, our business, financial condition,
results of operations, cash flows or prospects could be materially adversely affected. In such case, the trading price of our common stock could decline and
you could lose part or all of your investment. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also
adversely affect our business, financial condition, results of operations, cash flows, prospects or stock price, which we refer to collectively as a material
adverse effect on us (or comparable phrases).
Summary Risk Factors
Risks Related to Our Business
•
The COVID-19 pandemic in the United States may continue to cause, and other pandemics, epidemics or outbreaks may cause, effects which
materially and adversely affect our business, results of operations and financial condition.
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• An economic downturn, the COVID-19 pandemic, including new variants of COVID-19, war, including a potential escalation of the current
conflict in the Ukraine, or other events may affect consumer purchases from us as well as their ability to repay their credit obligations to us, which
could result in a material adverse effect on us.
• We may not be able to open or profitably operate new stores in existing, adjacent or new geographic markets.
• We have plans for significant future capital needs and the inability to access our Revolving Credit Facility or the capital markets on favorable
terms or at all may have a material adverse effect on us.
• Our existing and future levels of indebtedness could adversely affect our financial health, ability to obtain financing in the future, ability to react to
changes in our business and ability to fulfill our obligations under such indebtedness.
• Our debt securities may receive ratings that may increase our borrowing costs.
• We might not be able to access the securitization market for capital from time to time in the future, which may require us to seek alternative and
more costly sources of financing.
• One of our operating subsidiaries may be required to repurchase certain finance receivables if representations and warranties about the quality and
nature of such receivables are breached, which may negatively impact our results of operations, financial condition, and liquidity.
• A decrease in our credit sales, a decline in credit quality of our customers or other factors outside of our control could lead to a decrease in our
product sales and profitability.
•
Covenants in our debt agreements impose various operating and financial restrictions on us, and if we are not able to comply with such covenants,
our lenders could accelerate our indebtedness, proceed against certain collateral we have provided or exercise other remedies, which could have a
material adverse effect on us.
• Deterioration in the performance of our customer receivables portfolio could materially adversely affect our liquidity position and profitability.
•
In deciding whether to extend credit to customers, we rely on the accuracy and completeness of information furnished to us by or on behalf of our
credit customers, and we assume certain behavior and attributes on the basis of prior customers. If we and our systems are unable to detect any
misrepresentations in this information, or if our assumptions prove inaccurate, it may have a material adverse effect on us.
• Our policy of re-aging certain delinquent borrowers affects our delinquency statistics and the timing and amount of our write-offs, and may lead to
higher delinquency statistics in the future, which could have a material adverse effect on our financial results.
• We rely on internal models to manage risk and to provide accounting estimates. We could suffer a material adverse effect if those models do not
provide reliable accounting estimates or predictions of future activity.
• We benefit from the collection of customer and non-customer recoveries on our customer accounts receivables. Our inability to continue to collect
these recoveries could adversely affect our financial results.
• Our reported results require the judgment of management, and we could be subject to risks associated with these judgments or could be adversely
affected by the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements.
•
Changes in customer demand and product mix could materially adversely affect our business.
• We may experience significant price pressures over the life cycle of our products from competing technologies and our competitors.
• A disruption in our relationships with, the operations of, or the supply of product from any of our key suppliers, including those suppliers and
manufacturers located in Asia and Mexico, whether due to COVID-19, geopolitical conflict or otherwise, could have a material adverse effect on
us.
• Our stores are concentrated in the southern region of the U.S., especially Texas, which subjects us to regional risks, such as the economy,
outbreaks, the performance of energy markets, weather conditions, hurricanes and other natural or man-made disasters.
• Our information technology systems for our key business processes are vulnerable to damage that could harm our business.
• Our information technology systems may not be adequate to meet our evolving business and emerging regulatory needs and the failure to
successfully implement new systems could negatively impact our business and financial results.
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•
•
If we cannot continue to offer third party payment solutions for customers who do not qualify for our proprietary credit offerings, our business
may be impaired.
If we are unable to continue to offer third-party repair service agreements to our customers, we could incur additional costs or repair expenses,
which could materially adversely affect us.
• Our costs to protect our intellectual property rights, infringement of which could impair our name and reputation, could be significant.
•
•
•
•
Failure to protect the security of our customers’, employees’ or suppliers’ information or failure to comply with data privacy and protection laws
could expose us to litigation, compromise the integrity of our products, damage our reputation and materially adversely affect us.
Failure to successfully utilize and manage e-commerce, and to compete effectively with the growing e-commerce sector, could materially
adversely affect our business and prospects.
If we fail to maintain adequate systems and processes to detect and prevent fraudulent activity, including in our e-commerce business, our business
could be materially adversely impacted.
Because we maintain a significant supply of cash and inventories in our stores, we may be subject to employee and third-party robberies,
burglaries, thefts, riots and looting, and may be subject to liability as a result of crimes at our stores.
• We face risks with respect to product liability claims and product recalls, which could materially adversely affect our reputation, our business, and
our consolidated results of operations.
Risks Related to Laws and Regulation
• Our business could be materially adversely affected by changes in consumer protection laws and regulations.
•
•
The CFPB may reshape the consumer financial laws and there continues to be uncertainty as to how the agency’s actions will impact our business.
Judicial or administrative decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we
use illegal or unenforceable.
• We are required to comply with laws and regulations regulating extensions of credit and other dealings with customers and our failure to comply
with applicable laws and regulations, or any adverse change in those laws or regulations, could have a negative impact on our business.
• We face the risk of litigation resulting from calls and text messages in violation of the TCPA.
• A large number of our stores are located in the State of Texas, which subjects us to concentrated regulatory risks.
Risks Related to Our Business
The COVID-19 pandemic in the United States may continue to cause, and other variants, epidemics or outbreaks may cause, effects which materially
and adversely affect our business, results of operations and financial condition. COVID-19 has created significant worldwide volatility, uncertainty and
disruption. In particular, COVID-19 has resulted in declines in business activities, a significant number of business closures, slowdowns, suspensions or
delays of production and commercial activity, and weakened economic conditions, both in the U.S. and abroad.
In response to the continuing COVID-19 pandemic in the United States, further store closure and stay-at-home orders may reduce our customer traffic and
lead to additional temporary reductions in operating hours. Furthermore, the COVID-19 pandemic may impact the number and timing of new store
openings. The extent of these disruptions to our business and operations, and the full scale and scope of their effect, is currently uncertain and not possible
to reasonably predict at this time.
In addition, the significant economic disruption caused by the pandemic could have an adverse effect on our credit segment if, for example, customers are
unable to make timely payments on their accounts due to job loss, reduction of hours or furlough.
As the COVID-19 pandemic continues to unfold, or if other widespread variants, pandemics, or outbreaks were to occur, particularly if any such epidemic,
pandemic or outbreak were to affect regions where we derive a significant amount of our revenue or profit or where our suppliers are located (as with the
COVID-19 pandemic), governmental and public responses could materially and adversely disrupt our business and operations, and our business and results
of operations may be materially and adversely affected.
We could also be materially and adversely affected if government authorities impose restrictions (or additional restrictions) on operations of retailers, or
restrict the import or export of products, or if suppliers issue mass recalls of products. Even if such
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measures are not implemented and an outbreak of virus or other disease does not spread significantly, the perceived risk of infection or health risk may
adversely affect our business, results of operations and financial condition.
In addition, the impacts of COVID-19 and efforts to contain it have heightened the other risks described in this Annual Report on Form 10-K.
An economic downturn, outbreaks, the COVID-19 pandemic, war, including a potential escalation of the current conflict in the Ukraine, or other
events may affect consumer purchases from us as well as their ability to repay their credit obligations to us, which could result in a material adverse
effect on us. Many factors affect consumer spending, including regional or world events, war, diseases, outbreaks or epidemics (including the ongoing
COVID-19 crisis), including a potential escalation of the current conflict in the Ukraine, conditions in financial markets, local, state and national budgets
and fiscal operations and conditions, general business conditions, interest rates, inflation, energy prices, consumer debt levels, the availability of consumer
credit, taxation, unemployment trends and other matters that influence consumer confidence. Consumer purchases of our products and customers making
payments to us decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions. Decreases in
consumer confidence, instability in financial markets and political environment and volatile oil prices have negatively impacted our markets and may
present significant challenges to our operations in the future. Additionally, we believe a portion of our customer base continues to experience significant
economic challenges and uncertainty, including stagnant incomes or incomes that have not returned to pre-recession levels, and that those challenges could
be intensified by various macroeconomic factors, including increasing inflationary pressures and significant recent disruption in financial markets in
connection with the COVID-19 pandemic, increased unemployment, rising interest rates, increases in the cost of energy, and other factors.
We may not be able to open or profitably operate new stores in existing, adjacent or new geographic markets. There are a number of factors that could
affect our ability to successfully execute our store growth strategy, including:
•
The duration, scope, and severity of COVID-19;
• Difficulties associated with the hiring, training and retention of skilled personnel, including store managers;
•
•
•
•
The availability of financial resources;
The availability of favorable sites in existing, adjacent or new markets on terms, including price, consistent with our business plan;
Competition in existing, adjacent or new markets;
Competitive conditions, consumer tastes and discretionary spending patterns in adjacent or new markets that are different from those in our
existing markets or changes in competitive conditions, consumer tastes and discretionary spending patterns in our existing markets;
• A lack of consumer demand for our products or financing programs at levels that can support store growth or the profitability of existing stores;
•
Inability to make customer financing programs available that allow consumers to purchase products at levels that can support store growth;
• An inability to manage a greater number of new customers from new stores;
•
Limitations created by covenants and conditions under our debt agreements, including our Revolving Credit Facility, the indenture governing our
senior notes and our asset-backed notes;
• An inability or unwillingness of vendors to supply product on a timely basis or at competitive prices;
• An inability to secure consumer lending licenses in new or adjacent states or markets;
•
The failure to open enough stores in new markets to achieve a sufficient market presence and realize the benefits of leveraging our advertising and
distribution systems;
• Unfamiliarity with local real estate markets and demographics in adjacent and new markets;
•
Problems in adapting our distribution and other operational and management systems to an expanded network of stores; and
• Higher costs for direct mail, television, newspaper, digital, radio and out-of-home targeted advertising.
These and other similar factors may also limit the ability of any newly opened stores to achieve sales and profitability levels consistent with our projections
or comparable with our existing stores or to become profitable at all. As a result, we may determine that we need to close or reduce the hours of operation
of certain stores, which could have a material adverse effect on us.
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If we are unable to effectively manage the growth of our business, our revenues may not increase, our cost of operations may rise and our results of
operations may decline. As we continue to grow and expand our store base, we will face various business risks associated with growth, including the risk
that our management, financial controls and information systems will be inadequate to support our expansion. Our growth will require management to
expend significant time, effort, and additional resources to ensure the continuing adequacy of our financial controls, operating procedures, information
systems, product purchasing, warehousing and distribution systems and employee training programs. While we have engaged in and focused on these
elements, we cannot predict whether we will be able to effectively manage the increased demand resulting from expansion in current markets or into new
markets, or respond on a timely basis to the changing demands that our expansion will impose on our management, financial controls and information
systems. If we fail to successfully manage the challenges of growth, do not continue to improve our systems and controls or encounter unexpected
difficulties during expansion, our growth plan may not yield the results we currently anticipate and we could be materially adversely affected.
We have plans for significant future capital needs and the inability to access our Revolving Credit Facility or the capital markets on favorable terms or
at all may have a material adverse effect on us. We generally finance our operations primarily through a combination of cash flow generated from
operations, borrowings under our Revolving Credit Facility, and securitizations of customer receivables through the capital markets. Our ability to access
capital through our existing Revolving Credit Facility, raise additional capital by expanding our Revolving Credit Facility, or undertake future
securitization or other debt or equity transactions on economically favorable terms or at all, depends in large part on factors that are beyond our control,
including:
•
Conditions in the securities and finance markets generally, including as a result of the COVID-19 pandemic, and for securitized instruments in
particular;
• A negative bias toward our industry by capital market participants;
• Our credit rating or the credit rating of any securities we may issue;
• General economic conditions and the results of our earnings, cash flows and balance sheet;
•
•
•
Security or collateral requirements;
The credit quality and performance of our customer receivables;
Regulatory restrictions applicable to us;
• Our overall business and industry prospects;
• Our overall sales performance, profitability, cash flow, balance sheet quality, regulatory restrictions;
• Our ability to provide or obtain financial support for required credit enhancement;
• Our ability to adequately service our financial instruments;
• Our ability to make required representations and warranties;
• Our ability to meet debt covenant requirements; and
•
Prevailing interest rates, including rising interest rates.
The amount of our planned capital expenditures may be limited by, among other factors, the availability of capital to fund new store openings and customer
receivable portfolio growth. If adequate capital is not available at the time we need it, we may have to curtail future growth or change our expansion plans,
which could have a material adverse effect on us.
We use our customer receivables, in addition to our inventory, as collateral to support our capital needs. As the aggregate amount and performance of our
customer receivables has fluctuated, from time to time we have required amendments to our credit facilities in order to stay in compliance with our
obligations thereunder. If we require such amendments in the future and are unable to obtain them, or if we are unable to arrange substitute financing
facilities or other sources of capital, then we may be unable to continue drawing funds under our Revolving Credit Facility, which would force us to limit or
cease offering credit through our finance programs. Likewise, if the borrowing base under our Revolving Credit Facility is reduced, or otherwise becomes
unavailable, or we are unable to arrange substitute financing facilities or other sources of capital, we may have to limit the amount of credit that we make
available through our customer credit programs. A reduction in our ability to offer customer credit could have a material adverse effect on us. Further, our
inability, or limitations on our ability, to obtain funding through securitization facilities or other sources may materially adversely affect our ability to
provide additional credit to existing customers, which could have a material adverse effect on our profitability under our credit programs if such existing
customers fail to repay outstanding credit. Additionally, the inability of any of the financial institutions providing our financing facilities to fund their
respective commitments could materially adversely affect our ability to fund our credit programs, capital expenditures and other general corporate needs.
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Our existing and future levels of indebtedness could adversely affect our financial health, ability to obtain financing in the future, ability to react to
changes in our business and ability to fulfill our obligations under such indebtedness. As of January 31, 2022, we had aggregate outstanding
indebtedness, including under our Revolving Credit Facility, senior notes and various classes of asset-backed notes, of $519.8 million. This level of
indebtedness could:
• Make it more difficult for us to satisfy our obligations with respect to our outstanding notes and other indebtedness, resulting in possible defaults
on and acceleration of such indebtedness;
•
•
•
•
•
Require us to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our indebtedness, thereby
reducing the availability of such cash flows to fund working capital, acquisitions, new store openings, capital expenditures and other general
corporate purposes;
Limit our ability to obtain additional financing for working capital, acquisitions, new store openings, capital expenditures, debt service
requirements and other general corporate purposes;
Limit our ability to refinance indebtedness or cause the associated costs of such refinancing to increase;
Increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations (because a portion of our
borrowings are at variable rates of interest); and
Place us at a competitive disadvantage compared to our competitors with proportionately less debt or comparable debt at more favorable interest
rates which, as a result, may be better positioned to withstand economic downturns.
Any of the foregoing impacts of our level of indebtedness could have a material adverse effect on us.
Our debt securities may receive ratings that may increase our borrowing costs. We may elect to issue securities for which we may seek to obtain a rating
from a rating agency. It is possible, however, that one or more rating agencies may independently determine to assign a rating to any of our issued debt
securities. If any ratings are assigned to any of our debt, or the asset-backed notes or other securities with a rating, such ratings, if they are lower than
market expectations or are subsequently lowered or withdrawn, whether as a result of our actions or factors which are beyond our control, could increase
our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. Inability to access
the credit markets on acceptable terms, if at all, could have a material adverse effect on our financial condition.
We might not be able to access the securitization market for capital from time to time in the future, which may require us to seek alternative and more
costly sources of financing. We have successfully consummated a number of securitization transactions, however, there can be no assurances that we will
be able to complete additional securitization transactions if securitization markets become constrained. The economic recession that began in 2009 and
events in the securitization markets, as well as the debt markets and the economy generally, caused significant dislocations, lack of liquidity in the market
for asset-backed securities, and a severe disruption in the wider global financial markets, including a significant reduction of investor demand for, and
purchases of, asset-backed securities and structured financial products. Additional or prolonged disruptions in the securitization market, such as a recession
triggered by the effects of the ongoing COVID-19 crisis, could preclude our ability to use securitization as a financing source, or could render it an
inefficient source of financing making us more dependent on alternative sourcing of financing that might not be as favorable as securitizations or might be
otherwise unfavorable or unavailable altogether.
Securitization structures are subject to an evolving regulatory environment that may affect the availability and attractiveness of securitization as a
financing option. In the U.S., following the economic recession that began in 2009, there has been increased political and regulatory scrutiny of the asset-
backed securities industry, which has resulted in increased regulation. The impact of such regulations on investors in securitization markets and the
incentives for certain investors to hold asset-backed securities remain unclear, and may have a material adverse effect on the liquidity of such securities,
which could have a material adverse effect on our liquidity. Additionally, rules from various agencies now require sponsors of asset-backed securities to
retain an ownership stake in securitization transactions. Any adverse changes to these regulations could effectively limit our access to securitization as a
source of financing or alter the structure of securitizations, which could pose risks to our participation in any securitizations or could reduce or eliminate
the economic incentives to us of participating in securitizations.
One of our operating subsidiaries may be required to repurchase certain finance receivables if representations and warranties about the quality and
nature of such receivables are breached, which may negatively impact our results of operations, financial condition, and liquidity. We have entered into
certain financing arrangements, including issuances of asset-backed notes (collectively, “Financing Transactions”), that are secured by retail installment
contracts and direct consumer loans originated by our operating subsidiaries (the “Receivables”). In connection with the Financing Transactions, our
operating subsidiaries sold the Receivables to certain of our wholly-owned special purpose VIEs and made certain representations and warranties about the
quality and nature of the Receivables.
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If there is a breach of those representations and warranties, one of our operating subsidiaries may be obligated to repurchase the affected Receivables. If our
operating subsidiary is required to repurchase Receivables that were previously sold in connection with the Financing Transactions, this could have a
materially adverse impact on our results of operations, financial condition, and liquidity.
A decrease in our credit sales, a decline in credit quality of our customers or other factors outside of our control could lead to a decrease in our product
sales and profitability. A significant portion of our credit portfolio is comprised of credit provided to customers considered to be sub-prime borrowers who
have limited credit history, low income or past credit problems. Entering into credit arrangements with such customers entails a higher risk of customer
default, higher delinquency rates and higher losses than extending credit to more creditworthy customers. While we believe that our pricing and the
underwriting criteria and collection methods we employ enable us to effectively and appropriately manage the higher risks inherent in issuing credit to sub-
prime customers, no assurance can be given that such pricing and underwriting criteria and methods will afford adequate protection against such risks. We
have experienced volatility in delinquency and charge-off rates on our customer receivables, each of which has the effect of decreasing our profitability.
Some of our customer receivables become delinquent from time to time. Some accounts end up in default, due to various factors, such as general and local
economic conditions, including the impact of rising interest rates, living costs and unemployment rates. As we continue to expand into new markets, we
will obtain new customer receivables that may present a higher risk than our existing customer receivables since new customer receivables do not have an
established credit history with us.
If we reduce the amount of credit we grant to our customers (whether due to financial or regulatory constraints, including regulatory constraints relating to
interest rates), or if our customers curtail entering into credit arrangements with us, whether as a result of prolonged economic uncertainty in the U.S.,
increases in unemployment or other factors, we likely would sell fewer products, which could result in a material adverse effect on us. Further, because a
significant number of payments we receive on credit accounts are made in person by customers in one of our store locations, any decrease in credit sales
could reduce traffic in our stores and result in lower revenues. A decline in the credit quality of our credit accounts could also cause an increase in our
credit losses, which would result in an adverse effect on our earnings. A decline in credit quality could also lead to stricter underwriting criteria which
could have a negative impact on net sales.
We maintain an allowance for doubtful accounts on our customer accounts receivable. If the allowance for doubtful accounts is inadequate, we would
recognize losses in excess of the allowance, which could have a material adverse effect on us.
Covenants in our debt agreements impose various operating and financial restrictions on us, and if we are not able to comply with such covenants, our
lenders could accelerate our indebtedness, proceed against certain collateral we have provided or exercise other remedies, which could have a material
adverse effect on us. The covenants in our Revolving Credit Facility, the indenture governing our senior notes, and our asset-backed notes contain a
number of restrictions that impose operating and financial restrictions on us and may limit our ability to execute our growth strategy or engage in acts that
may be in our long-term best interest, including restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on
equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. In addition, we must maintain compliance
with certain financial covenants. Our ability to meet those financial covenants can be affected by events beyond our control, and we may be unable to meet
them.
A breach of the covenants could result in an event of default under our Revolving Credit Facility or the indenture governing our senior notes or our asset
backed notes. Such a default may allow the applicable creditors to accelerate the related debt and may result in the acceleration of any other debt to which a
cross-default provision applies. Furthermore, if we are unable to repay the amounts due and payable under our Revolving Credit Facility, the lenders
thereunder could proceed against the collateral granted to them to secure that indebtedness, which could have a material adverse effect on us. In the event
our lenders accelerate the repayment of our borrowings, we may not have sufficient funds to repay that indebtedness.
Increased borrowing costs will negatively impact our results of operations. Because most of our consumer credit programs have interest rates equal to the
highest rate allowable under applicable state law, we would generally not be able to pass higher borrowing costs along to future consumer credit customers
and our results of operations could be negatively impacted. The interest rates on our Revolving Credit Facility are variable based upon an applicable margin
determined by a pricing grid plus a London Interbank Offered Rate (“LIBOR”) or alternate base rate, and increases in such rates would reduce our margins.
The level of interest rates in the market in general will impact the interest rate on any debt instruments we issue in the future. Additionally, we may issue
debt securities or enter into credit facilities under which we pay interest at a higher rate than we have historically paid, which would further reduce our
earnings and negatively impact our results of operations.
We may be adversely affected by changes in the method of determining LIBOR or the replacement of LIBOR with an alternative reference rate,
including the Secured Overnight Financing Rate (“SOFR”). As of January 31, 2022, we had approximately $149.0 million of variable-rate indebtedness,
which uses LIBOR as a benchmark for establishing the interest rate. Publication of non-U.S. dollar LIBOR ceased after publication on December 31, 2021
and the publication of U.S. dollar LIBOR rates for the most common tenors (overnight and one, three, six and twelve months) will cease after publication
on June
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30, 2023, instead of on December 31, 2021 as previously expected. The U.K. Financial Conduct Authority (the "FCA") and the LIBOR Administrator have
emphasized that, despite any continued publication of U.S. dollar LIBOR rates through June 30, 2023, no new contracts using U.S. dollar LIBOR rates
should be entered into after December 31, 2021. Accordingly, the transition away from the widespread use of LIBOR to alternative rates is expected to
occur over the next couple of years. Further, there is no assurance that LIBOR, of any particular currency and tenor, will continue to be published until any
particular date. The timing of the transition and the consequences of these developments cannot be entirely predicted but could include an increase in the
cost of our variable-rate indebtedness and other commercial arrangements tied to LIBOR.
Furthermore, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”),
which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to U.S. dollar-LIBOR in derivatives and other financial
contracts. SOFR is a broad U.S. Treasury repo financing rate that represents overnight secured funding transactions and is fundamentally different from
LIBOR for two key reasons. First, SOFR is a secured rate, while LIBOR is an unsecured rate. Second, SOFR is an overnight rate, while LIBOR represents
interbank funding over different maturities. As a result, there can be no assurance that SOFR will perform in the same way as LIBOR would have at any
time, including as a result of changes in interest and yield rates in the market, market volatility or global or regional economic, financial, political,
regulatory, judicial or other events, and since its publication began in 2018, daily changes in SOFR have, on occasion, been more volatile than daily
changes in comparable benchmark or other market rates. Accordingly, we cannot predict whether changes related to the phase-out of LIBOR, including
insufficient liquidity in the SOFR markets, alternative reference rates or other reforms, as they occur, will not have an adverse effect on the amount of
interest paid on, or the market value of, our current or future debt obligations.
In addition, we have incurred and expect to incur further expenses to renegotiate or clarify the rate provisions in certain of our variable-rate arrangements to
affect the transition away from LIBOR-based rates and implement replacement indices, as necessary, but may not be able to do so on terms favorable to us.
Furthermore, uncertainty regarding the continued use and reliability of LIBOR as a benchmark rate and uncertainty regarding its replacement could disrupt
the financial markets or adversely affect the value of our arrangements tied to LIBOR.
Deterioration in the performance of our customer receivables portfolio could materially adversely affect our liquidity position and profitability. Our
liquidity position and profitability are heavily dependent on our ability to collect our customer receivables. If the performance of our customer receivables
portfolio were to substantially deteriorate, that could have a material adverse effect on the liquidity available to us and our ability to comply with the
covenants and borrowing base calculations under our Revolving Credit Facility, and our earnings may decline due to higher provisions for bad debt
expense, higher servicing costs, higher net charge-off rates and lower interest and fee income.
Our ability to collect from credit customers may be impaired by store closings. In the event of store closings, whether due to the COVID-19 pandemic or
otherwise, credit customers may not pay balances in a timely fashion, or may not pay at all, since a large number of our customers remit payments in store
and have not traditionally made payments to a non-store location.
In deciding whether to extend credit to customers, we rely on the accuracy and completeness of information furnished to us by or on behalf of our
credit customers, and we assume certain behavior and attributes on the basis of prior customers. If we and our systems are unable to detect any
misrepresentations in this information, or if our assumptions prove inaccurate, it may have a material adverse effect on us. In deciding whether to
extend credit to customers, we rely heavily on information furnished to us by or on behalf of our credit customers, including employment and personal
financial information, and our ability to validate such information through third-party services. We also assume certain behavior and attributes observed for
prior customers. Our ability to effectively manage our credit risk could be impaired, and could have a material adverse effect on us, if a significant
percentage of our credit customers intentionally or negligently misrepresent any of this information, and our systems do not detect such misrepresentations,
or if unexpected changes in behavior caused by macroeconomic conditions, changes in consumer preferences, availability of alternative products or other
factors cause our assumptions to be inaccurate.
Our policy of re-aging certain delinquent borrowers affects our delinquency statistics and the timing and amount of our write-offs, and may lead to
higher delinquency statistics in the future, which could have a material adverse effect on our financial results. Re-aging is offered to certain of our
past-due customers if they meet the conditions of our re-age policy. Our decision to offer a delinquent customer a re-age program is based on that
borrower’s specific condition, our history with the borrower, the amount of the loan and various other factors. When we re-age a customer’s account, we
move the account from a delinquent status to a current status. Management exercises a considerable amount of discretion over the re-aging process and has
the ability to re-age an account multiple times during its life. Treating an otherwise uncollectible account as current affects our delinquency statistics, as
well as impacts the timing and amount of charge-offs and, potentially, our future financial results. If these accounts had been charged off sooner, our net
loss rates for earlier periods might have been higher. If the customer defaults on the re-aged account, our re-aging may have simply postponed a
delinquency, and our future delinquency statistics will be correspondingly higher.
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If we fail to properly staff and train our collections personnel or timely contact delinquent borrowers, the number of delinquent customer receivables
eventually being charged off could increase. We contact customers with delinquent credit account balances soon after the account becomes delinquent.
During periods of increased delinquencies, it is important that we are proactive in dealing with customers rather than simply allowing customer receivables
to go to charge-off. Historically, when our servicing becomes involved at an earlier stage of delinquency with credit counseling and workout programs,
there is a greater likelihood that the customer receivable will not be charged off.
The success of our collection efforts depends on our collection center being properly staffed and our staff being properly trained to assist borrowers in
bringing delinquent balances current and ultimately avoiding charge-off. If we do not properly staff and train our collections personnel, or if we incur any
downtime or other issues with our information systems that assist us with our collection efforts, then the number of accounts in a delinquent status or
charged-off could increase. In addition, managing a substantially higher volume of delinquent customer receivables typically increases our operational
costs. A rise in delinquencies or charge-offs could result in a material adverse effect on us.
We rely on internal models to manage risk and to provide accounting estimates. We could suffer a material adverse effect if those models do not provide
reliable accounting estimates or predictions of future activity. We make significant use of business and financial models in connection with our efforts to
measure and monitor our risk exposures and to manage our credit portfolio. For example, we use models as a basis for credit underwriting decisions,
portfolio delinquency, charge-off and collection expectations and other market risks, based on economic factors and our experience. The information
provided by these models is used in making business decisions relating to strategies, initiatives, transactions and pricing, as well as the size of our
allowance for doubtful accounts, among other accounting estimates.
Models are inherently imperfect predictors of actual results because they are based on current and historical data available to us and our assumptions about
factors such as credit demand, payment rates, default rates, delinquency rates and other factors that may overstate or understate future experience. Our
models could produce unreliable results for a number of reasons, including the limitations of historical data to predict results due to unprecedented or
unforeseen events or circumstances, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes
in economic conditions, changes in credit policies, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a
model to products or events outside of the model’s intended use. In particular, models are less dependable when the prevailing economic environment is
different than historical experience.
In addition, we continually receive new economic data. Our critical accounting estimates, such as the size of our allowance for doubtful accounts, are
subject to change, often significantly, due to the nature and magnitude of changes in economic conditions. However, there is generally a lag between the
availability of this economic information and the preparation of corresponding internal models. When economic conditions change quickly or in unforeseen
ways, there is increased risk that the assumptions and inputs reflected in our models are not representative of current economic conditions.
Changes in the economy, regulatory landscape, credit policies and practices, and the credit and capital markets have required, and will continue to require,
frequent adjustments to our models and the application of greater management judgment in the interpretation and adjustment of the results produced by our
models, including in connection with market uncertainty driven by the COVID-19 pandemic and other matters. The application of greater management
judgment reflects the need to take into account updated information while continuing to maintain controlled processes for model updates, including model
development, testing, independent validation and implementation. As a result of the time and resources, including technical and staffing resources, that are
required to perform these processes effectively, it may not be possible to replace existing models quickly enough to ensure that they will always properly
account for the impacts of recent information and actions.
If circumstances prove our models to be undependable or not representative of our results, then we may deem it necessary to increase our allowance for
doubtful accounts in the future. If our actual charge-offs exceed the assumption used to establish the allowance, our provision for losses would increase and
could result in a material adverse effect on us.
We benefit from the collection of customer and non-customer recoveries on our customer accounts receivables. Our inability to continue to collect
these recoveries could adversely affect our financial results. Once an account is charged-off, we continue to pursue collections from various recovery
sources, including the customer, various state taxing jurisdictions in which sales tax was remitted and our third party insurance and warranty carriers that
sold insurance and warranty products. If we are unable to continue to pursue our collections efforts as a result of operational, legislative, contractual or
other changes, our financial results could be adversely affected.
Our reported results require the judgment of management, and we could be subject to risks associated with these judgments or could be adversely
affected by the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements. The
preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities, at the dates of the consolidated financial statements and the reported amounts of revenue and expenses
during the reporting periods. In addition, we prepare our financial statements in accordance with generally accepted accounting principles
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(“GAAP”), and GAAP and its interpretations are subject to change over time. If new rules, different judgments, or interpretations of existing rules require
us to change our financial reporting, our results of operations and financial condition could be materially adversely affected, and we could be required to
restate historical financial reporting.
Some of our customers may be recent immigrants and some may not be US citizens. Changes in immigration policies that affect states that share a
border with Mexico may negatively impact our retail sales. We follow customer identification procedures including accepting government-issued picture
identification, but we do not verify the immigration status of our customers. If we or the retail credit offering sector receive negative publicity around
making loans to potentially undocumented immigrants, it may draw additional attention from regulatory agencies or advocacy groups, which may harm our
sales and collections results. While our credit models look to approve customers who have stability of residency and employment, it is possible that a
significant change in immigration patterns, policies or enforcement could cause our customers to reduce their business with us, or not engage in business
transactions with us, and cause a reduction in sales or an increase in account delinquencies. Changes in immigration policies that affect states that share a
border with Mexico may continue to create sales challenges and to negatively impact our retail sales in stores along the Mexican border. There is no
assurance that a significant change in US immigration patterns, laws, regulations or enforcement will not occur, and any such significant change could have
a material adverse impact on us.
If we lose key management or are unable to attract and retain the qualified sales and credit granting and collection personnel required for our
business, our operating results could suffer. Our success depends to a significant degree on the skills, experience and continued service of our key
executives and the identification of suitable successors for them. While our key executives are subject to non-competition restrictions and other negative
contractual covenants, if we lose the services of any of these individuals and we are unable to identify a suitable successor, or if one or more of them or
other key personnel decide to join a competitor or otherwise compete directly or indirectly with us, our business and operations could be harmed, and we
could have difficulty in implementing our strategy. In addition, our sales and credit operations are largely dependent upon our labor force. As our business
grows, and as we incur turnover in current positions, we will need to locate, hire and retain additional qualified sales personnel in a timely manner and
develop, train and manage an increasing number of management level sales associates and other employees. Additionally, if we are unable to attract and
retain qualified credit granting and collection personnel, our ability to perform quality underwriting of new credit transactions and maintain workloads for
our collections personnel at a manageable level could be materially adversely affected, and our operations could be materially adversely impacted, resulting
in higher delinquency and net charge-offs on our credit portfolio. Competition for qualified employees could require us to pay higher wages, and increases
in the federal, state or local minimum wage or other employee benefits costs could increase our operating expenses. If we are unable to attract and retain
personnel as needed in the future or our operating expenses increase, our net sales and operating results could suffer.
We depend on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and
our other employees, including wage and hour regulations. Our workforce is comprised primarily of employees who work on an hourly basis. In certain
markets where we operate, there is significant competition for hourly employees. The lack of availability of an adequate number of hourly employees or an
increase in wages and benefits to current employees could have a material adverse effect on us. We are subject to applicable rules and regulations relating
to our relationship with our employees, including wage and hour regulations, health and workers’ compensation benefits, unemployment taxes, overtime
and working conditions and immigration status. Accordingly, legislated increases in the federal, state or local minimum wage, as well as increases in
additional labor cost components such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, would increase our
labor costs, which could have a material adverse effect on us.
We face significant competition from national, regional, local and internet retailers of furniture and mattresses, home appliances, and consumer
electronics. The retail market for consumer electronics, furniture and mattresses is highly fragmented and intensely competitive and the market for home
appliances is concentrated among a few major dealers. We currently compete against a diverse group of retailers, including national mass merchants,
specialized national retailers, home improvement stores, and locally-owned regional or independent retail specialty stores that sell furniture and mattresses,
home appliances, and consumer electronics, similar, and often identical, to those items we sell. We also compete with retailers that market products using
store catalogs and the internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our
current or future markets at any time. Additionally, we compete to some extent against companies offering weekly or monthly lease-to-own payment
options to credit constrained consumers for products for the home similar to those offered by us.
We may not be able to compete successfully against existing and future competitors. Some of our competitors have financial resources that may be
substantially greater than ours and they may be able to purchase inventory at lower costs and better endure economic downturns. If we cannot offer
competitive prices to our customers, our sales may decline or we may be required to accept lower profit margins. Our competitors may respond more
quickly to new or emerging technologies and may
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have greater resources to devote to promotion and sale of products and services. If two or more competitors consolidate their businesses or enter into
strategic partnerships, they may be able to compete more effectively against us.
Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including:
•
•
Expansion by our existing competitors or entry by new competitors into markets where we currently operate;
Lower pricing;
• Aggressive advertising and marketing;
•
•
•
Extension of credit to customers on terms more favorable than we offer;
Extension of credit options to customers with lower credit quality than qualifies for the credit programs we offer;
Larger store size, or innovative store formats, which may result in greater operational efficiencies; and
• Adoption of improved retail sales methods.
Competition from any of these sources could cause us to lose market share, sales and customers, limit our ability to attract new customers, increase
expenditures or reduce prices, any of which could have a material adverse effect on us.
Changes in customer demand and product mix could materially adversely affect our business. Our products must appeal to a broad range of consumers
whose preferences cannot be predicted with certainty and are subject to change. Our ability to maintain and increase sales depends to a large extent on the
introduction and availability of new products and technologies and our ability to respond timely to customer demands and preferences for such new
products. It is possible that the introduction of new products will never achieve widespread consumer acceptance or will be supplanted by alternative
products and technologies that do not offer us a similar sales opportunity or are sold at lower price points or margins. We may be unable to anticipate these
buying patterns, which could result in a material adverse effect on us. In addition, we often make commitments to purchase products from our vendors
several months in advance of proposed delivery dates. Significant deviation from the projected demand for products that we sell could affect our inventory
strategies, which may have an adverse effect on us, either from lost sales or lower margins due to the need to reduce prices to dispose of excess inventory.
Furthermore, due to our increasing emphasis on furniture and mattress offerings, we are building larger new stores and investing additional capital to
expand existing stores to accommodate those offerings. If we are unable to execute on our furniture and mattress offering strategy, it could have a material
adverse effect on us.
We may experience significant price pressures over the life cycle of our products from competing technologies and our competitors. Prices for many of
our products decrease over their life cycle. Such decreases often result in decreased gross profit margins. Suppliers may also take various steps, including
manufacturing lower-cost inventory in higher volumes, to increase their own profitability, which may negatively impact our margins and, as a result, our
profitability. Typically, new products, such as OLED, QLED, 4K Ultra HD and 8K televisions are introduced at relatively high price points that are then
gradually reduced as the product becomes mainstream. To sustain same store sales growth, unit sales must increase at a rate greater than the decline in
product prices. The affordability of products helps drive unit sales growth. However, as a result of relatively short product life cycles in the consumer
electronics industry, which limit the amount of time available for sales volume to increase, combined with rapid price erosion in the industry, retailers are
challenged to maintain overall gross margin levels and positive same store sales. We continue to adjust our marketing strategies to address this challenge
through the introduction of new product categories, new products within our existing categories and product innovations. If we fail to accurately anticipate
the introduction of new technologies, we may possess significant amounts of obsolete inventory that can only be sold at substantially lower prices than we
anticipated. In addition, we may not be able to maintain our historical margin levels in the future due to increased sales of lower margin products, such as
personal electronics products, and declines in average selling prices of key products, such as consumer electronics and home appliances. If sales of lower
margin items continue to increase and replace sales of higher margin items, or if our consumer electronics products average selling prices decrease due to
the maturity of their life cycle, our gross margin and overall gross profit levels may be materially adversely affected.
A disruption in our relationships with, the operations of, or the supply of product from any of our key suppliers, including those suppliers and
manufacturers located in Asia and Mexico, whether due to COVID-19, geopolitical conflict or otherwise, could have a material adverse effect on us.
The success of our business and growth strategies depends to a significant degree on our relationships with our suppliers, particularly our brand name
suppliers. We do not have long-term supply agreements or exclusive arrangements with a number of our vendors. We typically order our inventory through
the issuance of individual purchase orders to vendors. We have limited contractual assurance of the continued supply of merchandise we currently, or
would like to, offer our customers. We also rely on our suppliers for funds in the form of vendor allowances. We may be subject to rationing by suppliers
with respect to a number of limited distribution items. In addition,
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while we purchase products from approximately 100 manufacturers and distributors, we rely heavily on a relatively small number of suppliers. For
example, during fiscal year 2022, 73.3% of our total inventory purchases were from six vendors. The loss of any one or more of our key suppliers or failure
to establish and maintain relationships with these and other vendors, and limitations on the availability of inventory or repair parts, could have a material
adverse effect on our supply and assortment of products, as we may not be able to find suitable replacements to supply products at competitive prices, and
on our results of operations and financial condition.
If one of our vendors were to go out of business or were to be unable to fund amounts due to us, including payments due for returns of product and
warranty claims, it could have a material adverse effect on our results of operations and financial condition. Catastrophic or other unforeseen events,
including pandemics such as COVID-19, whether inside or outside the U.S., and geopolitical conflict, could materially adversely impact the supply and
delivery to us of products manufactured far from our sales facilities, including manufacturers or suppliers located in Asia and Mexico, which could
materially adversely impact our results of operations. In addition, because many of the products we sell are manufactured outside of the U.S., we may
experience labor unrest or an increase in the cost of imported vendor products, or an inability to secure imported merchandise, as a result of border taxes,
tariffs, or trade disputes at any time for reasons beyond our control. Any slow-downs, disruptions or strikes at any of the ports may have a material adverse
effect on our relationships with our customers and our business, potentially resulting in canceled orders by customers and reduced revenues and earnings. If
imported merchandise becomes more expensive, unavailable or difficult to obtain, we may not be able to meet the demands of our customers. Products
from alternative sources may also be more expensive than those our vendors currently import.
Our ability to enter new markets successfully depends, to a significant extent, on the willingness and ability of our vendors to supply merchandise to
additional distribution centers and stores. If vendors are unwilling or unable to supply some or all of their products to us at acceptable prices in one or more
markets, we could be materially adversely affected.
Furthermore, we rely on credit from vendors to purchase our products. A substantial change in credit terms from vendors or vendors’ willingness to extend
credit to us, including providing inventory under consignment arrangements, would reduce our ability to obtain the merchandise that we sell, which could
have a material adverse effect on us. In addition, if our vendors fail to continue to offer vendor allowances, or we are restricted in our ability to earn such
funds, our results of operations could be materially adversely affected.
Turmoil in financial markets and economic disruptions around the world may also negatively impact our suppliers’ access to capital and liquidity with
which to maintain their inventory, production levels, and product quality, and operate their businesses, all of which could materially adversely affect our
supply chain. It may also cause them to change their pricing policies, which could adversely impact demand for their products. Economic disruptions and
market instability may make it difficult for us and our suppliers to accurately forecast future product demand trends, which could cause us to carry too
much or too little merchandise in various product categories. In addition, to the extent that any manufacturer utilizes labor practices that are not commonly
accepted in the U.S., we could be materially adversely affected by any resulting negative publicity.
Our same store sales fluctuate significantly. Our same store sales have fluctuated significantly from quarter to quarter historically and may fluctuate in
the future. A number of factors have historically affected, or may in the future affect, our same store sales, including:
•
Changes in competition, such as pricing pressure, and the opening of new stores by competitors in our markets;
• General economic conditions;
•
Economic challenges faced by our customer base;
• New product introductions;
•
•
•
•
Changes in our marketing programs;
Consumer trends;
Changes in our merchandise mix;
Changes in the relative sales price points of our major product categories;
• Underwriting standards for our customers purchasing merchandise on credit;
• Our ability to offer credit programs attractive to our customers;
•
The impact of any new stores on our existing stores;
• Our ability to manage our supply chain and inventory as a result of relocations of and restructurings to our distribution centers;
• Weather events and conditions in our markets;
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•
•
•
•
•
•
COVID-19 and other pandemics or outbreaks;
Timing of promotional events;
Timing, location and participants of major sporting events;
The number of new store openings;
The percentage of our stores that are mature stores that tend to be smaller or have fewer assortment of higher margin products, such as furniture;
The locations of our stores and the traffic drawn to those areas;
• How often we update our stores;
• Our ability to execute our business strategy effectively;
•
•
Staffing levels; and
Lease-to-own penetration rates.
In the past we have been named as a defendant in multiple securities class action lawsuits and are currently defendants in shareholder derivative
lawsuits. Potential similar or related litigation or investigations could result in substantial damages and may divert management’s time and attention
from our business. We and certain of our current and former officers and directors were previously named as defendants in securities class action lawsuits
and are still named in related shareholder derivative lawsuits. Please see additional detail in Part II, Item 8., in Note 12, Contingencies, of the Consolidated
Financial Statements of this Annual Report on Form 10-K.
These lawsuits or future such lawsuits could result in the diversion of management’s time and attention away from business operations, which could harm
our business and also harm our relationships with existing customers and vendors. They may also materially damage our reputation and the value of our
brand. Our legal expenses incurred in defending these lawsuits, or future such lawsuits, have been, and could be, significant, and rulings against us, or
settlements, could have a material adverse effect on us.
There can be no assurance that any litigation to which we are, or in the future may become, a party will be resolved in our favor. These lawsuits and any
other lawsuits that we may become party to are subject to inherent uncertainties, and the costs to us of defending litigation matters will depend upon many
unknown factors. Any claim that is successfully decided against us may require us to pay substantial damages, including punitive damages, and other
related fees, or prevent us from selling certain of our products. Regardless of whether lawsuits are resolved in our favor or if we are the plaintiff or the
defendant in the litigation, any lawsuits to which we are or may become a party will likely be expensive and time consuming to defend or resolve.
Pending litigation relating to the sale of credit insurance and the sale of repair service agreements in the retail industry could have a material adverse
effect on us. State attorneys generals and private plaintiffs have filed lawsuits against other retailers relating to improper practices in connection with the
sale of credit insurance and repair service agreements in several jurisdictions around the country. We offer credit insurance in our stores on sales financed
under our credit programs and require customers to purchase credit insurance from us, or provide evidence from a third-party insurance provider, at their
election, in connection with sales of merchandise on credit. Therefore, similar litigation could be brought against us. While we believe we are in full
compliance with applicable laws and regulations, if we are found liable in any future lawsuit regarding credit insurance or repair service agreements, we
could be required to pay substantial damages or incur substantial costs as part of an out-of-court settlement or require us to modify or suspend certain
operations, any of which could have a material adverse effect on us. An adverse judgment or any negative publicity associated with our repair service
agreements or any potential credit insurance litigation could also affect our reputation, which could have a negative impact on our cash flow and results of
operations.
Pending or unforeseen litigation and the potential for adverse publicity associated with litigation could have a material adverse effect on us. We are
involved from time to time in various legal proceedings arising in the ordinary course of our business, including primarily commercial, consumer finance,
debt collections, product liability, employment and intellectual property claims. We currently do not expect the outcome of any pending matters to have a
material adverse effect on our consolidated results of operations, financial position or cash flows. Litigation, however, is inherently unpredictable, and it is
possible that the ultimate outcome of one or more pending claims asserted against us, or claims that may be asserted in the future that we are currently not
aware of, or adverse publicity resulting from any such litigation, could adversely impact our business, reputation, sales, profitability, cash flows and
financial condition.
In recent years many participants in the manufacturing, retail and software industries have been the target of patent litigation claimants making demands or
filing claims based upon alleged patent infringement through the manufacturing and selling,
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either in merchandise or through software and internet websites, of product or merely providing access through website portals. We, in conjunction with
multiple other parties, have been (and remain) the targets of such claims. While we believe that we have not violated or infringed any third-party alleged
patent rights, and intend to defend vigorously any such claims, the cost to defend, settle or pay any such claims could be substantial and could have a
material adverse effect on us.
Failure to effectively manage our costs could have a material adverse effect on our profitability. Certain elements of our cost structure are largely fixed
in nature. Consumer spending remains uncertain, which makes it more challenging for us to maintain or increase our operating income. The
competitiveness in our industry and increasing price transparency means that the focus on achieving efficient operations is greater than ever. As a result, we
must continuously focus on managing our cost structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating
leases, charge-offs, other store expenses or indirect spending could materially adversely affect us.
Our stores are concentrated in the southern region of the U.S., especially Texas, which subjects us to regional risks, such as the economy, outbreaks,
the performance of energy markets, weather conditions, hurricanes and other natural or man-made disasters. If the southern region of the U.S. suffers
an economic downturn or any other adverse regional event, such as an outbreak, a collapse of the oil and gas market, or inclement weather, it could have a
material adverse effect on us as a result of the concentration of our stores in such region. Several of our competitors operate stores in various regions across
the U.S. and thus may not be as vulnerable to the risks associated with operating in a concentrated region. The states and the local economies where many
of our stores are located are dependent, to a degree, on the oil and gas industries, which can be very volatile due to fluctuations of commodities prices or
other causes. Because of fears of climate change and adverse effects of drilling explosions and oil spills, legislation has been considered, and governmental
regulations and orders have been issued, which, combined with the local economic and employment conditions caused by both, could materially adversely
impact the oil and gas industries and the economic health of areas in which a significant number of our stores are located.
Acts of violence at or threatened against our stores or the centers in which they are located, including active shooter situations, protests and terrorism,
could unfavorably impact our sales, which could have a material adverse effect on us. Any act of violence at or threatened against our stores or the
centers in which they are located, including active shooter situations, protests and terrorist activities, may result in restricted access to our stores and/or
store closures in the short-term, and in the long-term, may cause our customers to avoid our stores. Any such situation could adversely impact cash flows
and make it more difficult to fully staff our stores, which could have a material adverse effect on us.
Our information technology systems for our key business processes are vulnerable to damage that could harm our business. Our ability to operate our
business, including our ability to manage our credit and collections, operations and inventory levels, largely depends on the efficient operation of our
computer hardware and software systems. We use management information systems, including our credit underwriting, loan management, inventory
management and collections systems, to track inventory information at the store level, communicate customer information, aggregate daily sales and
expense information and manage our credit portfolio, including processing credit applications and managing collections. In addition, we license these
systems from third parties. These systems and our operations are subject to damage or interruption from, among other things:
•
Power loss, computer systems failures and internet, telecommunications or data network failures;
• Operator negligence, unauthorized access or improper operation by, or supervision of, employees;
•
•
•
•
Physical and electronic loss of data or security breaches, misappropriation and similar events;
Computer viruses;
Intentional acts of vandalism and similar events;
Failures on behalf of third parties from which we license certain of these systems to provide timely, quality and regular access to or maintenance
of such systems; and
• Hurricanes, fires, floods and other natural disasters.
In addition, the software that we have developed internally to use in our daily operations may contain undetected errors that could cause our network to fail
or our expenses to increase. Any failure of our owned or licensed systems due to any of these or other causes could cause an interruption in our operations
and result in reduced net sales and results of operations. Though we have implemented contingency and disaster recovery processes in the event of one or
several technology failures, any unforeseen failure, interruption or compromise of our systems or our security measures could adversely affect our business
and harm our reputation. The risk of possible failures or interruptions may not be adequately addressed by us or the third-parties on which we rely, and such
failures or interruptions could occur. The occurrence of any failures or interruptions could have a material adverse effect on us.
Our information technology systems may not be adequate to meet our evolving business and emerging regulatory needs and the failure to successfully
implement new systems could negatively impact our business and financial results. We are
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investing capital in new information technology systems and implementing modifications and upgrades to existing systems to support our growth plan.
These investments include replacing legacy systems, making changes to existing systems, building redundancies, and acquiring new systems and hardware
with updated functionality. We are taking actions to ensure the successful implementation of these initiatives, including the testing of new systems and the
transfer of existing data, with minimal disruptions to our business and collections, but there can be no guarantee of success. These efforts may take longer
and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our existing
systems and our business, and may not provide the anticipated benefits. Any disruption in our information technology systems, or our inability to improve,
or failure to upgrade, integrate or expand our systems to meet our evolving business and emerging regulatory requirements, could impair our ability to
achieve critical strategic initiatives and could have a material adverse effect on us.
We could lose our access to customer and credit data sources, which could cause us competitive harm and have a material adverse effect on us. We are
heavily dependent on customer and credit data provided by third party providers. Our data providers could stop providing data, provide untimely, incorrect
or incomplete data, or increase the costs for their data for a variety of reasons, including a perception that our systems are insecure as a result of a data
security breach or regulatory concerns or for competitive reasons. We could also become subject to increased legislative, regulatory or judicial restrictions
or mandates on the collection, disclosure or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally
use the data. If we were to lose access to this external data or if our access or use were restricted or were to become less economical or desirable, our
business would be negatively impacted, which would adversely affect our operating results and financial condition. We cannot provide assurance that we
will be successful in maintaining our relationships with these external data source providers or that we will be able to continue to obtain data from them on
acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain comparable data from alternative sources on favorable
terms or at all if our current sources become unavailable.
If we cannot continue to offer third party payment solutions for customers who do not qualify for our proprietary credit offerings, our business may be
impaired. Currently, if a customer does not qualify for our credit offering for a particular purchase in our stores, but qualifies with a payment solutions
provider not affiliated with us but with whom we have a commercial relationship, then we sell the applicable merchandise to such payment solutions
provider, which leases the merchandise to the customer under a lease-to-own arrangement, and we record a cash sale. In fiscal year 2022, our third-party
payment solution providers providing lease-to-own arrangements, represented approximately 10.4% of our retail revenue. Our third-party payment and
credit solutions providers’ business models are subject to various risks that are outside of our control. If, as a result of any of these risks, our third-party
payment and credit solutions providers are unable to, or otherwise determine not to continue operating with us at a level or on terms similar to the level or
on terms we have historically operated, or if we are unable to establish new partnerships with different providers on favorable terms or at all, then we could
lose sales or revenue, our financial results could be adversely affected, our ability to execute our growth plan could be impeded and we could otherwise
suffer a material adverse effect.
If we are unable to continue to offer third-party repair service agreements to our customers, we could incur additional costs or repair expenses, which
could materially adversely affect us. There are a limited number of insurance carriers that provide repair service agreement programs. If repair service
agreement programs become unavailable from our current providers for any reason, we may be unable to provide repair service agreements to our
customers on the same or similar terms, or at all. Even if we are able to obtain a substitute provider, higher premiums may be required, which could have a
material adverse effect on our profitability if we are unable to pass along the increased cost of such coverage to our customers. Inability to maintain the
repair service agreement program could cause fluctuations in our repair expenses, impact our credit portfolio losses, and cause greater volatility of earnings
and could require us to become the obligor under new contracts we sell.
If we are unable to maintain group credit insurance policies from insurance carriers, which allow us to offer their credit insurance products to our
customers purchasing our merchandise on credit, our revenues may be reduced or our credit losses may increase. There are a limited number of
insurance carriers that provide credit insurance coverage for sale to our customers. If credit insurance becomes unavailable for any reason we may be
unable to offer substitute coverage on the same or similar terms, or at all. Even if we are able to obtain substitute coverage, it may be at higher rates or
reduced coverage, which could affect customer acceptance of these products, reduce our revenues or increase our credit losses.
We utilize a limited number of home delivery service providers. The loss of any one provider could have a material negative impact on our home
delivery operations. If our third-party merchandise delivery services are unable to meet our promised delivery schedule, unable to maintain expense
controls, or cease operations, including due to the economic impact of various factors including the COVID-19 pandemic or energy market disruption, our
net sales may decline due to a decline in customer satisfaction, and profitability levels may be negatively impacted. For many purchases, we offer next day
delivery to our customers that we outsource to one of our third-party delivery service providers. The loss of any one service provider, or the failure to
establish and maintain relationships with these or other similar service providers, could have a material negative impact on our home delivery operations.
These third-parties are subject to risks that are beyond our control and, if they fail to
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timely or satisfactorily deliver our products, we may lose business from customers in the future and could suffer damage to our reputation. The loss of
customers or damage to our reputation could have a material adverse effect on us. Further, if our third-party delivery service providers are unable to
maintain expense controls, our profitability and results of operations may be negatively impacted.
Changes in trade policy, currency exchange rate fluctuations and other factors beyond our control could materially adversely affect our business. A
significant portion of our inventory is manufactured or assembled overseas in Asia and in Mexico. Changes in U.S. and foreign governments’ trade policies
have resulted in, and may continue to result in, tariffs on imports into and exports from the U.S. Throughout 2018 and 2019, the U.S. imposed tariffs on
imports from several countries, including China. While the impact of the tariffs was minimal to the Company in fiscal year 2021 and 2022, because many
of the products that we sell are manufactured in foreign jurisdictions, including China, other such tariffs could have a negative impact on our business in
the future. The current administration in Washington, D.C. may likely take a different view on tariffs with China. In addition, if the U.S. were to withdraw
from or materially modify international trade agreements, similar to the replacement of the North American Free Trade Agreement with the United States-
Mexico-Canada Agreement in November 2018, certain foreign-sourced goods that we sell may no longer be available at commercially attractive prices or
at all, resulting in a material adverse effect on us. Additionally, currency fluctuations, including a devaluation of the U.S. dollar, border taxes, import tariffs,
or other factors beyond our control may increase the cost of items we purchase or create shortages of these items, which in turn could have a material
adverse effect on us. Conversely, significant reductions in the cost of these items in U.S. dollars may cause a significant reduction in the retail prices of
those products, resulting in a material adverse effect on us.
Our costs to protect our intellectual property rights, infringement of which could impair our name and reputation, could be significant. We believe that
our success and ability to compete depends in part on consumer identification of the name “Conn’s” and we rely on certain trademark registrations and
common law rights to protect the distinctiveness of our brand. We intend to protect vigorously our trademarks against infringement, misappropriation or
dilution by others. A third-party, however, could attempt to misappropriate our intellectual property or claim that our intellectual property infringes or
otherwise violates third-party trademarks in the future. Any litigation or claims relating to our intellectual property brought by or against us, whether with
or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect
on us.
Failure to protect the security of our customers’, employees’ or suppliers’ information or failure to comply with data privacy and protection laws could
expose us to litigation, compromise the integrity of our products, damage our reputation and materially adversely affect us. Our business regularly
captures, collects, handles, processes, transmits and stores significant amounts of sensitive information about our customers, employees, suppliers and
others, including financial records, credit and business information, and certain other personally identifiable or other sensitive personal information. A
number of other retailers have experienced security breaches, including a number of highly publicized incidents involving well-known retailers. To our
knowledge, we have not suffered a significant security breach. While we have implemented systems and processes to protect against unauthorized access to
or use of secured data and to prevent data loss and theft, there is no guarantee that these procedures are adequate to safeguard against all data security
breaches or misuse of data. In addition, we rely on the secure operation of our website and other third-party systems generally to assist us in the collection
and transmission of the sensitive data we collect. Our information systems are vulnerable to damage or interruption from power outages, computer and
telecommunications failures, computer viruses, security breaches (including credit card information breaches), vandalism, catastrophic events and human
error or malfeasance. A compromise of our information security controls or of those businesses with which we interact, which results in confidential
information being accessed, obtained, damaged, or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory
actions and claims from customers, employees, financial institutions, payment card associations and other persons, any of which could materially adversely
affect us. Moreover, a data security breach could require that we expend significant resources related to our information systems and infrastructure, and
could distract management and other key personnel from performing their primary operational duties. If our information systems are damaged, fail to work
properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical information,
customer disruption and interruptions or delays in our ability to perform essential functions and implement new and innovative services. In addition,
compliance with changes in privacy and information security laws and standards may result in considerable expense due to increased investment in
technology and the development of new operational processes.
We maintain data breach and network security liability insurance, but we cannot be certain that our coverage will be adequate for any liabilities actually
incurred or that insurance will continue to be available to us on economically reasonable terms or at all. We may need to devote significant resources to
protect against security breaches or to address problems caused by breaches, which would divert resources from the growth and expansion of our business.
Our tax liabilities could be materially impacted by any changes in the tax laws of the jurisdictions in which we operate, beginning operations in new
states, and assessments as a result of tax audits. Legislation could be introduced at any time that changes our tax liabilities in a way that has a material
adverse effect on us. In particular, because of the extent of our operations
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in Texas, the Texas margin tax, which is based on gross profit rather than earnings, can create significant volatility in our effective tax rate. In addition, our
entry into new states in the future could subject us to additional tax rate volatility, dependent upon the tax laws in place in those states. Moreover, we
periodically review our indirect tax audit reserve based on recent assessments of prior year periods. In the event that actual results differ from our estimate,
we may revise our estimate of post-audit periods, which could materially impact our financial condition and results of operations.
We are subject to sales, income and other taxes, which can be difficult and complex to calculate due to the nature of our business. A failure to correctly
calculate and pay such taxes could result in substantial tax liabilities and have a material adverse effect on us. The application of indirect taxes, such as
sales tax, is a complex and evolving issue and we may not have accrued or remitted required amounts to various jurisdictions. Many of the fundamental
statutes and regulations that impose these taxes were established before the growth of e-commerce and, therefore, in many cases it is not clear how existing
statutes apply to certain aspects of our business and we rely on advice from our third-party tax advisors. In addition, governments are increasingly looking
for ways to increase revenues, which has resulted in discussions about tax reform and other legislative action to increase tax revenues, including through
indirect taxes. This also could result in other adverse changes in or interpretations of existing sales, income and other tax regulations, the exact nature or
effect of which cannot be reasonably calculated, but which could have a material adverse effect on us.
Failure to successfully utilize and manage e-commerce, and to compete effectively with the growing e-commerce sector, could materially adversely
affect our business and prospects. Our website provides new and existing customers with the ability to review our product offerings and prices, apply for
credit, and make payments on their credit accounts. Customers may apply for credit, be approved for credit, and complete a transaction to purchase
merchandise on our website. Customers may also purchase certain products on our website using a credit card. Our website is a significant component of
our advertising strategy. We believe our website represents a possible source for future sales and growth in our credit sales. In order to promote our
products and services, allow our customers to complete credit applications in the privacy of their homes and on their mobile devices and make payments on
their accounts, and drive traffic to our stores, we must effectively create, design, publish and distribute content over the internet. We currently offer certain
credit-qualified customers the ability to complete an entire purchase transaction financed online. We are monitoring and adjusting the availability of our
online sales channels for credit performance and profitability. There can be no assurance that we will be able to design and publish web content with a high
level of effectiveness or grow our e-commerce business in a profitable manner. Certain of our competitors, and a number of e-commerce retailers, have
established e-commerce operations against which we compete for customers. It is possible that the increasing competition from the e-commerce sector may
reduce our market share, gross margin or operating margin, and may have a material adverse effect on us.
If we fail to maintain adequate systems and processes to detect and prevent fraudulent activity, including in our e-commerce business, our business
could be materially adversely impacted. Criminals are using increasingly sophisticated methods to engage in illegal activities such as paper instrument
counterfeiting, fraudulent payment or refund schemes and identity theft. As we make more of our services available over the internet and other media, and
as we expand into new geographic regions without an established customer base, we subject ourselves to increased consumer fraud risk. While we believe
past incidents of fraudulent activity have been relatively isolated, we cannot be certain that our systems and processes will always be adequate in the face of
increasingly sophisticated and ever-changing fraud schemes. We use a variety of tools to protect against fraud, but these tools may not always be successful
at preventing such fraud. Instances of fraud may result in increased costs, including possible settlement and litigation expenses, and could have a material
adverse effect on us.
Our reputation, ability to do business and operating results may be impaired by improper conduct by any of our employees, agents or business partners.
Our employees, agents or business partners may violate the policies and procedures we have implemented to ensure compliance with applicable laws.
Improper actions by any of the foregoing could subject us to civil, criminal or administrative investigations, could lead to substantial civil and criminal,
monetary and non-monetary penalties, and related shareholder lawsuits, could cause us to incur significant legal fees, and could damage our reputation.
Because we maintain a significant supply of cash and inventories in our stores, we may be subject to employee and third-party robberies, burglaries,
thefts, riots and looting, and may be subject to liability as a result of crimes at our stores. Our business requires us to maintain a significant supply of
cash, loan collateral and inventories in most of our stores. As a result, we are subject to the risk of robberies, burglaries, thefts, riots and looting. Although
we have implemented various programs in an effort to reduce these risks, maintain insurance coverage for robberies, burglaries and thefts and utilize
various security measures at our facilities, there can be no assurance that robberies, burglaries, thefts, riots and looting will not occur. The extent of our
cash, loan collateral and inventory, losses or shortages could increase as we expand the nature and scope of our products and services. Robberies,
burglaries, thefts, riots and looting could lead to losses and shortages and could have a material adverse effect on us. It is also possible that violent crimes
such as armed robberies may be committed at our stores. We could experience liability or adverse publicity arising from such crimes. For example, we may
be liable if an employee, customer, guard or bystander suffers bodily injury or other harm. Any such event may have a material adverse effect on us.
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We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs. We lease almost all of our
store locations, our corporate headquarters and our distribution centers. Our continued growth and success depends in part on our ability to locate property
for new stores and renew leases for existing locations. There is no assurance that we will be able to locate real estate and negotiate leases for new stores, or
renegotiate leases for existing locations, on the same or similar terms, or on favorable terms at all, and we could be forced to move or exit a market as a
result. Furthermore, a significant rise in real estate prices or real property taxes could result in an increase in store lease expense as we open new locations
and renew leases for existing locations, thereby negatively impacting our results of operations. Our inability to enter into new leases or renew existing
leases on terms acceptable to us, or be released from our obligations under leases for stores that we close, could materially adversely affect us.
We depend primarily on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating
activities to fund these expenses, we may not be able to service our lease expenses, which could materially adversely affect us. If an existing or future store
is not profitable, and we decide to close it, we may be nonetheless committed to perform our obligations under the applicable lease including, among other
things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we might not satisfy the contractual
requirements for early cancellation under that lease.
Failure to maintain positive brand perception and recognition could have a negative impact on our business. Maintaining a good reputation is critical to
the success of our business. The considerable expansion of the use of social media by our customers (including, but not only, as a result of our
technological outreach), has increased the risk that our reputation could be negatively impacted in a short amount of time. If we are unable to quickly and
effectively respond to criticism of our brand or reputation (on any basis), we may suffer declines in customer loyalty and traffic, vendor relationship issues,
and other consequences, all of which could have a material adverse effect on us.
We face risks with respect to product liability claims and product recalls, which could materially adversely affect our reputation, our business, and our
consolidated results of operations. We purchase merchandise from third-parties and offer this merchandise to customers for sale. This merchandise could
be subject to recalls and other actions by regulatory authorities. Changes in laws and regulations could also impact the type of merchandise we offer to
customers. We have experienced, and may in the future experience, recalls of merchandise. In addition, individuals may in the future assert claims that they
have sustained injuries from third-party merchandise offered by us, and we may be subject to future lawsuits relating to these claims. These claims or
liabilities may exceed, or fall outside the scope of, our insurance coverage. Any of the issues mentioned above could result in damage to our reputation,
diversion of management resources, or reduced sales and increased costs, any of which could have a material adverse effect on us.
We previously identified a material weakness in our internal controls over financial reporting. If we fail to maintain an effective system of internal
controls, our ability to product accurate and timely financial statements could be impaired, which could harm our business and have a material adverse
effect on the price of our common stock. In 2020, management and our independent registered public accounting firm identified a material weakness in
our internal controls over financial reporting related to information technology general controls (“ITGCs”). During fiscal year 2021, we implemented
measures to remediate this material weakness, and we concluded that it had been fully remediated as of January 31, 2021. However, our remedial actions
may not prevent this or similar weaknesses from occurring in the future.
We are required to comply with a variety of reporting, accounting and other rules and regulations. As a result, we maintain a system of internal control over
financial reporting, but there are limitations inherent in internal control systems and significant deficiencies or material weaknesses are possible. A control
system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system
must reflect the fact that there are resource constraints and the benefit of controls must be appropriate relative to their costs. Furthermore, compliance with
existing requirements is expensive and we may need to implement additional finance and accounting and other systems, procedures and controls to satisfy
our reporting requirements. If our internal control over financial reporting is determined to be ineffective, or if we are unable to appropriately or timely
remediate any such effectiveness, such failure could cause us to restate financial results that have been made public, cause investors to lose confidence in
our reported financial information, negatively affect the market price of our common stock, subject us to regulatory investigations and penalties, require us
to expend significant resources to remediate the deficiencies, impair our access to capital and otherwise materially adversely impact us.
Our governance documents and Delaware law provide certain anti-takeover measures which could discourage, delay or prevent a change in control of
the Company, even if such changes would be beneficial to our stockholders. Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, as well as provisions of the Delaware General Corporation Law (“DGCL”) could discourage, delay or prevent a merger,
acquisition or other change in control of the Company, even if such change in control would be beneficial to our stockholders. These provisions include:
• A prohibition on stockholder action without a meeting, unless such action has been approved in advance by our Board of Directors;
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• A prohibition on stockholders’ ability to call special meetings of stockholders;
•
•
Express powers to adjourn, postpone, reschedule or cancel meetings of stockholders, and rules regarding presiding, and conduct, at such meetings;
Significant advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings; and
• Authorization of the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of
outstanding shares and thwart a takeover attempt.
Further, we are subject to Section 203 of the DGCL, which limits certain transactions and business combinations between a corporation and a stockholder
owning 15% or more of the corporation’s outstanding voting stock for a period of three years from the date the stockholder becomes a 15% stockholder.
These provisions and our stockholders’ rights plan, either alone or in combination with each other, could delay, deter or prevent a change of control,
whether or not it is desired by, or beneficial to, our stockholders.
Our corporate actions may be substantially controlled by our principal stockholders and affiliated entities. A large proportion of our outstanding
common stock is beneficially owned by a small group of principal stockholders and their affiliates, including Stephens Inc., Stephens Group, BlackRock,
Inc. and Dimensional Fund Advisors LP. Large holders, such as these, may be able to affect matters requiring approval by Company stockholders,
including the election of directors and the approval of mergers or other business combination transactions. The concentration of ownership of our shares of
common stock by the relatively small number of investors and hedge funds may:
• Have significant influence in determining the outcome of any matter submitted to stockholders for approval, including the election of directors,
mergers, consolidations, and the sale of all or substantially of our assets or other significant corporate actions;
• Delay or deter a change of control of the Company;
• Deprive stockholders of an opportunity to receive a premium for their shares as part of a sale of the Company; and
• Affect the market price volatility and liquidity of our shares of common stock.
The interests of these investors and their respective affiliates may differ from or be adverse to the interests of our other stockholders. If any of these
investors sells a substantial number of shares in the public market, the market price of our shares could fall. The perception among the public that these
sales will occur could also contribute to a decline in the market price of our shares.
Risk Related to Laws and Regulations
We may expand our retail or credit offerings and become subject to different operating, regulatory or legal requirements. In addition to the retail and
consumer finance products we currently offer, we may offer other products and services in the future, including new financing products and services. These
products and services may require additional or different operating and compliance systems or have additional or different legal or regulatory requirements
than the products and services we currently offer.
To the extent we undertake expansion into additional states that allow for direct consumer lending, and do not have the proper legal and regulatory
compliance infrastructure, consumer lending licenses or personnel, or otherwise do not successfully execute such an expansion, or our customers do not
positively respond to such an expansion, it could have a material adverse effect on us.
Our business could be materially adversely affected by changes in consumer protection laws and regulations. Federal and state consumer protection
laws, regulations and agencies, such as the FCRA and the CFPB, heavily regulate the way we conduct business and could limit the manner in which we
may offer and extend credit and collect on our accounts. Because a substantial portion of our sales are financed through our credit offerings any adverse
change in the regulation of consumer credit could have a material adverse effect on us.
New laws or regulations, or new interpretations of existing laws or regulations, could limit the amount of interest or fees that may be charged on consumer
credit accounts, including by reducing the maximum interest rate that can be charged in the states in which we operate, or impose limitations on our ability
to collect on account balances, which could have a material adverse effect on us. Compliance with existing and future laws or regulations, including
regulations that may be applicable to us under the Dodd-Frank Act, could require the expenditure of substantial resources. Failure to comply with these
laws or regulations, even if inadvertent, could result in negative publicity, fines or additional licensing expenses, any of which could result in a material
adverse effect on us.
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We have procedures and controls in place that we believe are reasonable to monitor compliance with the numerous federal and state laws and regulations
and believe we are in compliance with such laws and regulations. However, these laws and regulations are complex, differ between jurisdictions and are
often subject to interpretation. As we expand into additional jurisdictions and offer new credit products such as our direct consumer loans, the complexities
grow. Compliance with these laws and regulations is expensive and requires the time and attention of management. If we do not successfully comply with
laws, regulations, or policies, we could incur fines or penalties, lose existing or new customers, or suffer damage to our reputation. Changes in these laws
and regulations can significantly alter our business environment, limit business operations, and increase costs of doing business, and we may not be able to
predict the impact such changes would have on our profitability.
The CFPB may reshape the consumer financial laws and there continues to be uncertainty as to how the agency’s actions will impact our business. The
Dodd-Frank Act comprehensively overhauled the financial services industry within the U.S. and established the CFPB. The CFPB has enforcement and
rulemaking authority under certain federal consumer financial laws, including, but not limited to, the TILA, ECOA, FCRA, FDCPA, and GLBA. This
means, for example, that the CFPB has the ability to adopt rules that interpret provisions of the FDCPA, potentially affecting all facets of debt collection.
Recently the CFPB published a revised final rule under the FDCPA that would, among other things, limit the timing and number of calls that can be made
to a consumer debtor by a third-party collection agency. This rule could impact our ability to contact our consumers and collect amounts owed. In addition,
the CFPB has issued guidance in the form of bulletins on debt collection and credit furnishing activities generally, including bulletins that address furnisher
requirements and the application of the CFPB’s prohibition on “unfair, deceptive, or abusive” acts or practices with respect to debt collection.
In addition, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to the products we offer. The system
could inform future agency decisions with respect to regulatory, enforcement, or examination focus. The CFPB is authorized to collect fines and provide
consumer restitution in the event of violations of certain consumer financial service laws, engage in consumer financial education, request data, and
promote the availability of financial services to under-served consumers and communities. There continues to be uncertainty as to how, or if, the CFPB and
its strategies and priorities will impact our businesses and our results of operations going forward and could result in new regulatory requirements and
regulatory costs for us.
Although we have committed substantial resources to enhancing our compliance programs, changes in regulatory expectations, interpretations or practices
could increase the risk of enforcement actions, fines and penalties. Actions by the CFPB, FTC and various state agencies could result in requirements to
alter our products and services that would make our products less attractive to consumers or impair our ability to offer them profitably. Future actions by
regulators that discourage the use of products we offer or steer consumers to other products or services could result in reputational harm and a loss of
customers. Should the CFPB, FTC and various state agencies change regulations adopted in the past by other regulators, or modify past regulatory
guidance, our compliance costs and litigation exposure could increase. This additional focus and regulatory oversight could significantly increase operating
costs.
Judicial or administrative decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use
illegal or unenforceable. Dispute arbitration provisions are commonplace in our customer credit arrangements. These provisions are designed to allow us
to resolve customer disputes through individual arbitration rather than in court. Our arbitration provisions explicitly provide that all arbitrations will be
conducted on an individual and not on a class basis. In the past, various courts and administrative authorities have concluded that arbitration agreements
with class action waivers are unenforceable, particularly where a small dollar amount is in controversy on an individual basis.
Any judicial or administrative decisions, federal legislation or final CFPB or other administrative rule that would impair our ability to enter into and
enforce consumer dispute arbitration agreements with class action waivers could significantly increase our exposure to class action litigation as well as
litigation in plaintiff-friendly jurisdictions. Such litigation could have a material adverse effect on us.
We are required to comply with laws and regulations regulating extensions of credit and other dealings with customers and our failure to comply with
applicable laws and regulations, or any adverse change in those laws or regulations, could have a negative impact on our business. A substantial
portion of our customers finance purchases through our credit offerings. The extension of credit to consumers and related collection efforts is a highly
regulated area of our business. Numerous federal and state laws impose disclosure and other requirements on the origination, servicing and enforcement of
credit accounts. These laws include, but are not limited to, TILA, ECOA, the Dodd-Frank Act, FCRA, GLBA, FTCA, FDCPA, MLA, SCRA, the Texas
Debt Collection Act and the Telephone Consumer Protection Act (“TCPA”). Our business practices, marketing and advertising terms, procedures and
practices for credit applications and underwriting, terms of credit extensions and related disclosures, data privacy and protection practices, and collection
practices, may be subject to periodic or special reviews by regulatory and enforcement authorities under the foregoing laws. These reviews could range
from investigations of specific consumer complaints or concerns to broader inquiries into our practices generally. If, as part of these reviews, the regulatory
authorities conclude that we are not complying with applicable laws or regulations, they could request or impose a wide range
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of sanctions and remedies including requiring changes in advertising and collection practices, changes in our credit application and underwriting practices,
changes in our data privacy or protection practices, changes in the terms of our credit or other financial products (such as decreases in interest rates or fees),
the imposition of fines or penalties, or the paying of restitution or the taking of other remedial action with respect to affected customers. They also could
require us to stop offering some of our credit or other financial products within one or more states, or nationwide.
Negative publicity relating to any specific inquiry or investigation, regardless of whether we have violated any applicable law or regulation or the extent of
any such violation, could negatively affect our reputation, our brand and our stock price, which could have a material adverse effect on us. If any
deficiencies or violations of law or regulations are identified by us or asserted by any regulator or other person, or if any regulatory or enforcement
authority or court requires us to change any of our practices, the correction of such deficiencies or violations, or the making of such changes, could have a
material adverse effect on us. We face the risk that restrictions or limitations resulting from the enactment, change, or interpretation of federal or state laws
and regulations, such as the Dodd-Frank Act, could negatively affect our business activities, require us to make significant expenditures or effectively
eliminate credit products or other financial products currently offered to customers.
Any failure on our part to comply with legal requirements in connection with credit or other financial products, or in connection with servicing or
collecting our accounts or otherwise dealing with consumers, could significantly impair our ability to collect the full amount of the account balances and
could subject us to substantial liability for damages or penalties. The institution of any litigation of this nature, or the rendering of any judgment against us
in any litigation of this nature, could have a material adverse effect on us.
We may also expand into additional jurisdictions or offer new credit products in existing jurisdictions. We must comply with the laws of each jurisdiction
we operate in, which are not uniform. New or different laws in new jurisdictions into which we expand, or changes to the laws in those jurisdictions or the
ones in which we currently operate, could increase our compliance costs, expose us to litigation risk or otherwise have a material adverse effect on us.
We face the risk of litigation resulting from calls and text messages in violation of the TCPA. Contacting current and prospective customers in connection
with delinquent accounts and marketing efforts are parts of our business. The TCPA restricts certain calling and the use of automated SMS text messages
without proper consent. This has resulted and may in the future result in civil claims against us. The scope and interpretation of the TCPA applicable to
calling and texting are continuously evolving and developing, and there are differing interpretations of the TCPA among the jurisdictions in which we
operate. In some cases, violations of the TCPA may be enforced by individual customers through class actions, and statutory penalties for TCPA violations
range from $500 to $1,500 per violation. If we do not comply with the TCPA or if we become liable under the TCPA, we could face direct liability and our
business and financial condition could be materially adversely affected.
A large number of our stores are located in the State of Texas, which subjects us to concentrated regulatory risks. Negative or unexpected legislative or
regulatory changes in Texas could have a material adverse effect on us. In Texas, the Office of the Consumer Credit Commissioner (“OCCC”) issues the
consumer loan licenses that permit us to offer direct consumer loans. The OCCC also regulates us as a licensee. We currently have 73 retail stores in Texas.
If we fail to establish or implement a proper regulatory infrastructure to comply with Texas’ regulatory requirements, the OCCC could restrict or rescind
our consumer loan licenses. A restriction on or a loss of such licenses issued could have a material adverse effect on our financial performance and cause
reputational harm. Failure on our part to comply with applicable consumer lending laws of the State of Texas could also expose us to consumer litigation
and regulatory enforcement action, possibly resulting in substantial penalties and claims for damages and, in certain circumstances, may subject us to
injunctions, require us to refund finance charges already paid, forgo finance charges not yet paid under credit accounts, change our credit extension,
servicing, collection, and marketing practices or a combination of the foregoing. Should Texas or the OCCC change laws, regulations or codes related to
consumer loans, or modify past regulatory guidance, our compliance costs and litigation exposure could increase. We believe that we are in substantial
compliance with the applicable consumer credit laws in the State of Texas.
Our inability to maintain our insurance licenses requirements in the states in which we operate and changes in premium and commission rates on the
insurance products we sell could have a material adverse effect on us. We derive a significant portion of our revenues and operating income from the
commissions we earn from the sale of various insurance products of third-party insurers to our customers. These products include credit insurance, repair
service agreements and product replacement policies. Most states and many local jurisdictions in which we operate require registration and licenses to sell
these products or otherwise conduct our business. These states and local jurisdictions have, in many cases, established criteria we must satisfy in order to
obtain, maintain and renew these licenses. For example, certain states or other jurisdictions require us to meet or exceed certain operational, advertising,
disclosure, collection and recordkeeping requirements and to maintain a minimum amount of net worth or equity. From time to time, we are subject to
audits in these jurisdictions to ensure we are satisfying the applicable requirements in order to maintain these necessary licenses. If, for any reason, we are
unable to satisfy these requirements, we might be unable to maintain our insurance licenses in the states and other jurisdictions in which we operate, we
might be subject to various fines and penalties or store closures, or our requests for new or renewed licenses may be
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denied, any of which consequences could have a material adverse effect on us. In addition, any material claims or future material litigation involving our
credit insurance agreements, repair service agreements or product replacement policies, or any decline in the commissions we retain from our sales of these
insurance products, may have a material adverse effect on us. Commissions earned on our credit insurance, repair service agreement or product
replacement agreement products could also be materially adversely affected by changes in statutory premium rates, commission rates, adverse claims
experience and other factors.
General Risk Factors
Stock market volatility may materially adversely affect the market price of our common stock. Our common stock price has been and is likely to continue
to be subject to significant volatility. A variety of factors could cause the price of our common stock to fluctuate substantially, including:
• General market fluctuations resulting from factors not directly related to our operations or the inherent value of our common stock;
•
State or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be, adverse to our operations;
• Announcements of developments related to our business or our competitors;
•
Fluctuations in our operating results and the provision for bad debts;
• General conditions in the consumer financial service industry, the domestic or global economy or the domestic or global credit or capital markets;
•
Changes in financial estimates by securities analysts;
• Our failure to meet the expectations of securities analysts or investors;
• Negative commentary regarding us and corresponding short-selling market behavior;
• Adverse developments in our relationships with our customers or vendors;
•
•
Legal proceedings brought against us or our officers and directors; and
Changes in our senior management team.
Due to the volatility of our stock price, we are and may be in the future the target of securities litigation. Such lawsuits generally result in the diversion of
management’s time and attention away from business operations, which could materially adversely affect us. In addition, the costs of defense and any
damages resulting from such litigation, a ruling against us, or a settlement of any such litigation could materially adversely affect our financial results.
We may incur property, casualty or other losses not covered by insurance. We maintain a program of insurance coverage for various types of property,
casualty and other risks. The types and amounts of insurance that we obtain vary from time to time, depending on availability, cost and our decisions with
respect to risk retention. The insurance policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance
basis. Losses not covered by insurance could be substantial and may increase our expenses, which could harm our results of operations and financial
condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The number of stores, distribution centers/cross-dock facilities, and corporate offices we operate, together with location and square footage information, are
disclosed in Part I, Item 1., Business, under the caption “Store Operations,” of this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS.
The information set forth in Part II, Item 8., in Note 12, Contingencies, of the Consolidated Financial Statements of this Annual Report on Form 10-K is
incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
PART II
EQUITY SECURITIES.
Market Information and Holders
As of March 21, 2022, we had approximately 485 common stockholders of record and an estimated 9,963 beneficial owners of our common stock. The
principal market for our common stock is the NASDAQ Global Select Market, where it is traded under the symbol “CONN.”
Dividends
No cash dividends were declared or paid in fiscal year 2022 or fiscal year 2021. We do not anticipate paying dividends in the foreseeable future. Any
future payment of dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash
requirements and other factors deemed relevant by the Board of Directors, including the terms of our indebtedness. Provisions in agreements governing our
long-term indebtedness restrict the amount of dividends that we may pay to our stockholders. See Item 7., Management’s Discussion and Analysis of
Financial Condition and Results of Operations, under the heading “Liquidity and Capital Resources.”
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information as of January 31, 2022, relating to our equity compensation plans to which grants of options, restricted stock
units or other rights to acquire shares of our common stock may be granted from time to time:
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights (a) (1)
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights (b) (2)
Number of
Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding
Securities Reflected
in Column (a))
Plan Category:
Equity compensation plans approved by stockholders
Equity compensation plans not approved by
stockholders
Total
2,117,087
—
2,117,087
$
$
10.37
—
10.37
2,214,702
—
2,214,702
(1) Inclusive of 720,166 stock options, 907,341 restricted stock units (“RSUs”) and 489,580 performance-based RSUs (“PSUs”).
(2) The $10.37 is inclusive of the 907,341 shares related to RSUs which only have a service requirement and the 489,580 PSUs that have a service,
performance and/or market requirement. Neither the RSUs nor PSUs have an exercise price. The weighted-average exercise price of the 720,166
outstanding stock options is $30.49.
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Performance Graph
The following graph compares the cumulative total stockholder return on our common stock for the last five fiscal years with the cumulative total returns of
the NASDAQ U.S. Stock Market Index and a customized peer group index comprised of Restoration Hardware, First Cash, Aaron’s, Rent-A-Center, La-Z-
Boy, Sleep Number, Ethan Allen, EZCORP, Haverty Furniture and Tuesday Morning (the “Peer Group”). The graph assumes an investment of $100 at the
close of trading on January 31, 2017, and reinvestment of any dividends. The stock performance shown below is based solely on historical data and is not
necessarily indicative of future performance.
Base Period
January 31,
2017
Value for the Fiscal Years Ended January 31,
2018
2019
2020
2021
2022
Company/Index:
Conn’s, Inc.
NASDAQ U.S. Stock Market Index
Peer Group
$
$
$
100.00 $
100.00 $
100.00 $
315.64 $
133.43 $
158.44 $
198.48 $
132.52 $
181.75 $
83.03 $
168.35 $
223.02 $
149.10 $
242.57 $
313.62 $
230.05
265.98
282.88
The information set forth under the heading “Performance Graph” is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the
SEC’s proxy rules or to the liabilities of Section 18 of the Exchange Act, and the graph shall not be deemed to be incorporated into any of our prior or
subsequent filings under the Securities Act of 1933, as amended (“Securities Act”), or the Exchange Act.
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Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of Conn’s common stock by Conn’s or its affiliates during the quarter ended January 31,
2022.
Period
November 1 - 30
December 1 - 31
January 1 - 31
Total
Total Number of Shares
Purchased (in thousands)
(1)
Average Price Paid per
Share
(2)
Total Number of Shares
Purchased as Part of
Publicly Announced
Program (in thousands)
(1)
Approximate Dollar Value
of Shares that may Yet Be
Purchased Under the
Program (in millions)
— $
1,127 $
1,476 $
2,603
—
21.07
23.75
— $
1,127 $
1,476 $
2,603
—
126.3
91.2
(1) On December 14, 2021, our Board of Directors approved a stock repurchase program pursuant to which we had the authorization to repurchase up to
$150 million of our outstanding common stock. The stock repurchase program expires on December 14, 2022. See Note 15. Stockholders' Equity, in
Part II, Item 8 of this Annual Report on Form 10-K for additional information related to share repurchases.
(2) Average price paid per share excludes costs associated with the repurchases.
ITEM 6. [Reserved]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We continue to monitor the evolving nature of COVID-19 and respond to its impact on our business. We have experienced and continue to experience
challenges related to the pandemic. These challenges have increased the complexity of our business and impacted our supply chain and sales for fiscal year
2022 and we expect it to continue into fiscal year 2023. Increased complexity, supply chain issues and reduced sales will likely continue until the effects of
COVID-19 diminish. The full impact of COVID-19 remains uncertain and will depend on future developments, including the origination, transmissibility
and severity of new variants, if any, and any related actions taken by federal, state and local government officials to prevent and manage disease spread, all
of which are uncertain and unpredictable.
This section provides a discussion of our historical financial condition, cash flows and results of operations for the periods indicated herein. We encourage
you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial
statements and related notes included herein and the discussion in Item 1. Business of this annual report on Form 10-K. This discussion contains forward-
looking statements that involve numerous risks and uncertainties. The forward-looking statements are subject to a number of important factors, including
those factors discussed in Item 1A. Risk Factors and Part I Forward-Looking Statements that could cause actual results to differ materially from the results
described or implied by such forward-looking statements.
Discussion and analysis of matters pertaining to the year ended January 31, 2020 and year-to-year comparisons between the years ended January 31, 2021
and 2020 are not included in this Form 10-K, but can be found under Part II, Item 7 of our annual report on Form 10-K for the year ended January 31, 2021
that was filed on March 31, 2021.
Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
Executive Summary
Total revenues were $1.59 billion for fiscal year 2022 compared to $1.39 billion for fiscal year 2021, an increase of $204.0 million or 14.7%. Retail
revenues were $1.31 billion for fiscal year 2022 compared to $1.07 billion for fiscal year 2021, an increase of $241.2 million or 22.7%. The increase in
retail revenue was primarily driven by an increase in same store sales of 15.3%, an increase in RSA commissions and new store sales growth with the
addition of 12 new stores. The increase in same store sales reflects an increase in demand across most of the Company's home-related product categories.
The increase also reflects the impact of fiscal year 2021 proactive underwriting changes, reductions in store hours and state mandated stay-at-home orders,
each of which was the result of the COVID-19 pandemic. Credit revenues were $283.7 million for the fiscal year
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2022 compared to $320.9 million for fiscal year 2021, a decrease of $37.2 million or 11.6%. The decrease in credit revenue was primarily due to a
decrease of 18.6% in the average outstanding balance of the customer accounts receivable portfolio. The decrease was partially offset by an increase in our
insurance commissions as well as an increase in our yield rate. The yield rate for the year ended January 31, 2022 was 22.8% compared to 21.7% for the
year ended January 31, 2021.
Retail gross margin for fiscal year 2022 was 36.7%, a decrease of 50 basis points from the 37.2% reported in fiscal year 2021. The year-over-year decrease
in retail gross margin was primarily driven by an increase in product costs and a slower rate of growth in repair service agreement commissions and service
revenues compared to the growth in product sales. This was partially offset by a shift in sales from lower margin products to higher margin products, lower
financing fees and the impact of fixed logistics costs on higher sales.
SG&A for fiscal year 2022 was $544.5 million compared to $478.8 million for fiscal year 2021, an increase of $65.7 million, or 13.7%, over the prior year.
The SG&A increase in the retail segment was primarily due to increases in labor and occupancy costs related to new store growth and increases in variable
expenses associated with same store sales growth, as well as increases in advertising and general operating costs. The SG&A increase for the credit
segment was primarily due to an increase in the corporate overhead allocated to the credit segment due to an increase in labor costs which was partially
offset by a decrease in allocated costs to the credit segment due to the lower average customer accounts receivable portfolio balance compared to the prior
year.
Provision for bad debts decreased to $48.2 million for the year ended January 31, 2022 from $202.0 million for the year ended January 31, 2021, a decrease
of $153.8 million. The year-over-year decrease was primarily driven by a greater decrease in the allowance for bad debts during the year ended January 31,
2022, compared to the decrease during the year ended January 31, 2021, and by a year-over-year decrease in net charge-offs of $100.9 million. The
decrease in the allowance for bad debts for the year ended January 31, 2022 was primarily driven by an improvement in the forecasted unemployment rate
that drove a $31.5 million decrease in the economic reserve and a decline in the customer portfolio receivable balance, partially offset by an increase in loss
rates. During the year ended January 31, 2021, the decrease in the allowance for bad debts was primarily driven by a decline in the customer accounts
receivable portfolio partially offset by a $42.5 million increase in the economic reserve driven by an increase in forecasted unemployment rates stemming
from the COVID-19 pandemic.
Interest expense decreased to $25.8 million for fiscal year 2022 compared to $50.4 million for fiscal year 2021, a decrease of $24.6 million, or 48.9%. The
decrease was driven by a lower average outstanding balance of debt and by a lower effective interest rate.
Net income for fiscal year 2022 was $108.2 million, or $3.61 per diluted share, compared to net loss of $3.1 million, or $0.11 per diluted share, for fiscal
year 2021.
How We Evaluate Our Operations
Senior management focuses on certain key indicators to monitor our performance including:
•
•
•
Same store sales - Our management considers same store sales, which consists of both brick and mortar and e-commerce sales, to be an important
indicator of our performance because they are important to our attempts to leverage our SG&A costs, which include rent and other store expenses,
and they have a direct impact on our total net sales, net income, cash and working capital. Same store sales is calculated by comparing the reported
sales for all stores that were open during both comparative fiscal years, starting in the first period in which the store has been open for a full
quarter. Sales from closed stores, if any, are removed from each period. Sales from relocated stores have been included in each period as each such
store was relocated within the same general geographic market. Sales from expanded stores have also been included in each period.
Retail gross margin - Our management views retail gross margin as a key indicator of our performance because it reflects our pricing power
relative to the prices we pay for our products. Retail gross margin is calculated by comparing retail total net sales to the cost of goods sold.
60+ Day Delinquencies - Our management views customer account delinquencies as a key indicator of our performance because it is a reflection
of the quality of our credit portfolio, it drives future credit performance and credit offerings, and it impacts the interest rates we pay on our asset-
backed securitizations. Delinquencies are measured as the percentage of balances that are 60+ days past due.
• Net Yield - Our management considers yield to be a key performance metric because it drives future credit decisions and credit offerings and
directly impacts our net income. Yield reflects the amount of interest we receive from our portfolio.
Company Initiatives
In fiscal year 2022, we grew retail sales by 22.7% reflecting the continued success of our strategic growth plan and our differentiated value proposition. We
also achieved record eCommerce sales as we expanded our digital capabilities.
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In the credit segment, we maintained our focus on enhancing our credit platform to support the pursuit of our long-term growth objectives. Our credit
segment continued to improve, reflecting the more sophisticated underwriting capabilities and strategy, improved collections and better execution on our
financing transactions, which has led to lower cost of funds. We delivered the following financial and operational results in fiscal year 2022:
Fiscal Year 2022 Financial Highlights:
•
•
•
•
Same store sales increased 15.3% for the fiscal year ended January 31, 2022, and increased 2.5% on a two-year basis;
Strong same store sales combined with the contribution of new stores drove a 22.7% increase in total retail sales;
eCommerce sales increased 171.3% to an annual record of $71.3 million;
Credit spread was 1,170 basis points, helping drive record credit segment income before taxes of $63.9 million;
• Net earnings increased to $3.61 per diluted share, compared to a net loss of $0.11 per diluted share last fiscal year; and
• We repurchased 2,603,479 of shares, retiring approximately 8.8% of the Company's outstanding shares as of October 31, 2021.
Outlook
As noted in the “Overview” above, our business and industry continue to be impacted by the COVID-19 pandemic in the United States. Going forward, the
full extent to which the pandemic will impact our supply chain, future business and operating results is uncertain. Government support, including the
American Rescue Plan Act of 2021, the Infrastructure Investment and Jobs Act, and 2021 child tax credit payments, has provided our customers with
additional financial means which we expect has helped our business. We feel we are well positioned to continue serving our customers and supporting our
employees as we continue to monitor and respond to the pandemic.
The broad appeal of our value proposition to our geographically diverse core demographic and the unit economics of our business should provide the
stability necessary to maintain and grow our business. We expect our brand recognition and long history in our core markets to give us the opportunity to
further penetrate our existing footprint, particularly as we leverage existing marketing spend, logistics infrastructure, and service footprint. There are also
many markets in the U.S. with demographic characteristics similar to those in our existing footprint, which provides substantial opportunities for future
growth. We plan to improve our operating results by leveraging our existing infrastructure and seeking to continually optimize the efficiency of our
marketing, merchandising, distribution and credit operations. As we expand in existing markets and penetrate new markets, we expect to increase our
purchase volumes, achieve distribution efficiencies and strengthen our relationships with our key vendors. Over time, we also expect our increased store
base and the resulting higher net sales to further leverage our existing corporate and regional infrastructure.
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Results of Operations
The following tables present certain financial and other information, on a consolidated basis:
Consolidated:
(in thousands)
Revenues:
Total net sales
Finance charges and other revenues
Total revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expense
Provision for bad debts
Charges and credits
Total costs and expenses
Operating income
Interest expense
Loss (gain) on extinguishment of debt
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Supplementary Operating Segment Information
Year Ended January 31,
2022
2021
Change
$
1,305,389 $
284,642
1,590,031
1,064,311 $
321,714
1,386,025
825,987
544,490
48,184
2,677
1,421,338
168,693
25,758
1,218
141,717
33,512
108,205 $
668,315
478,767
202,003
6,326
1,355,411
30,614
50,381
(440)
(19,327)
(16,190)
(3,137) $
$
241,078
(37,072)
204,006
157,672
65,723
(153,819)
(3,649)
65,927
138,079
(24,623)
1,658
161,044
49,702
111,342
Operating segments are defined as components of an enterprise that engage in business activities and for which discrete financial information is available
that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources and assess performance. We are
a leading specialty retailer and offer a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit
solution for our core consumers. We have two operating segments: (i) retail and (ii) credit. Our operating segments complement one another. The retail
segment operates primarily through our stores and website and its product offerings include furniture and mattresses, home appliances, consumer
electronics and home office products from leading global brands across a wide range of price points. Our credit segment offers affordable financing
solutions to a large, under-served population of consumers who typically have limited credit alternatives. Our operating segments provide customers the
opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next day delivery
and installation in the majority of our markets, and product repair service. We believe our large, attractively merchandised retail stores and credit solutions
offer a distinctive value proposition compared to other retailers that target our core customer demographic. The operating segments follow the same
accounting policies used in our consolidated financial statements.
We evaluate a segment’s performance based upon operating income (loss). SG&A includes the direct expenses of the retail and credit operations, allocated
corporate 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 calculated using an annual rate of 2.5% multiplied by the average outstanding
portfolio balance for each applicable period.
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The following table represents total revenues, costs and expenses, operating income (loss) and income (loss) before taxes attributable to these operating
segments for the periods indicated:
Retail Segment:
(dollars in thousands)
Revenues:
Product sales
Repair service agreement commissions
Service revenues
Total net sales
Finance charges and other
Total revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expense
Provision for bad debts
Charges and credits
(1)
Total costs and expenses
Operating income
Number of stores:
Beginning of fiscal year
Opened
End of fiscal year
Credit Segment:
(in thousands)
Revenues:
Finance charges and other revenues
Costs and expenses:
Selling, general and administrative expense
Provision for bad debts
Charges and credits
(1)
Total costs and expenses
Operating income (loss)
Interest expense
Loss (gain) on extinguishment of debt
Income (loss) before income taxes
Year Ended January 31,
2022
2021
Change
$
1,205,545 $
89,101
10,743
1,305,389
949
1,306,338
973,031 $
78,838
12,442
1,064,311
816
1,065,127
825,987
399,393
479
2,677
1,228,536
668,315
335,954
443
4,092
1,008,804
$
77,802 $
56,323 $
232,514
10,263
(1,699)
241,078
133
241,211
157,672
63,439
36
(1,415)
219,732
21,479
146
12
158
137
9
146
Year Ended January 31,
2022
2021
Change
$
283,693 $
320,898 $
(37,205)
145,097
47,705
—
192,802
90,891
25,758
1,218
63,915 $
142,813
201,560
2,234
346,607
(25,709)
50,381
(440)
(75,650) $
2,284
(153,855)
(2,234)
(153,805)
116,600
(24,623)
1,658
139,565
$
(1) For the years ended January 31, 2022 and January 31, 2021, the amount of overhead allocated to each segment reflected in SG&A was $40.6 million
and $32.0 million, respectively. For the years ended January 31, 2022 and January 31, 2021, the amount of reimbursement made to the retail segment
by the credit segment was $28.3 million and $34.8 million, respectively.
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Year ended January 31, 2022 compared to the year ended January 31, 2021
Revenues. The following table provides an analysis of retail net sales by product category in each period, including repair service agreement commissions
and service revenues, expressed both in dollar amounts and as a percent of total net sales:
(dollars in thousands)
Furniture and mattress
Home appliance
Consumer electronics
Home office
Other
Product sales
Repair service agreement
commissions
Service revenues
(1)
Total net sales
2022
411,167
500,051
191,234
66,707
36,386
1,205,545
89,101
10,743
1,305,389
$
$
Year Ended January 31,
% of Total
31.5 % $
38.3
14.6
5.1
2.8
92.3
6.8
0.9
100.0 % $
2021
322,770
390,964
172,932
65,405
20,960
973,031
78,838
12,442
1,064,311
% of Total
Change
%
Change
Same Store
% Change
30.3 % $
36.7
16.2
6.1
2.0
91.3
7.4
1.3
100.0 % $
88,397
109,087
18,302
1,302
15,426
232,514
10,263
(1,699)
241,078
27.4 %
27.9
10.6
2.0
73.6
23.9
13.0
(13.7)
22.7 %
16.8 %
20.6
7.3
(4.7)
66.0
16.2
6.0
15.3 %
(1) The total change in sales of repair service agreement commissions includes retrospective commissions, which are not reflected in the change in same
store sales.
The increase in product sales for the year ended January 31, 2022 was primarily driven by an increase in same store sales of 15.3%, an increase in RSA
commissions and new store sales growth through the opening of 12 stores. The increase in same store sales reflects an increase in demand across most of
the Company's home-related product categories. The increase also reflects the impact of fiscal year 2021 proactive underwriting changes, reductions in
store hours and state mandated stay-at-home orders, each of which was the result of the COVID-19 pandemic.
The following table provides the change of the components of finance charges and other revenues:
(in thousands)
Interest income and fees
Insurance income
Other revenues
Finance charges and other revenues
Year Ended January 31,
2021
2022
$
$
259,422 $
24,270
950
284,642 $
303,209 $
17,689
816
321,714 $
Change
(43,787)
6,581
134
(37,072)
The decrease in finance charges and other revenues was primarily due to a decrease of 18.6% in the average outstanding balance of the customer accounts
receivable portfolio. The decrease was partially offset by an increase in our insurance commissions as well as an increase in our yield rate. The yield rate
for the year ended January 31, 2022 was 22.8% compared to 21.7% for the year ended January 31, 2021.
The following table provides key portfolio performance information:
(dollars in thousands)
Interest income and fees
Net charge-offs
Interest expense
Net portfolio income
Average outstanding portfolio balance
Interest income and fee yield
Net charge-off %
$
$
$
Year Ended January 31,
2021
2022
259,422
(126,277)
(25,758)
107,387
1,135,991
$
$
$
22.8 %
11.1 %
303,209
(227,134)
(50,381)
25,694
1,395,428
$
$
$
21.7 %
16.3 %
Change
(43,787)
100,857
24,623
81,693
(259,437)
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Retail Gross Margin
(dollars in thousands)
Retail total net sales
Cost of goods sold
Retail gross margin
$
$
Year Ended January 31,
2021
2022
1,064,311
1,305,389
668,315
825,987
395,996
479,402
$
$
Change
241,078
157,672
83,406
$
$
Retail gross margin percentage
36.7 %
37.2 %
The year-over-year decrease in retail gross margin was primarily driven by an increase in product costs and a slower rate of growth in repair service
agreement commissions and service revenues compared to the growth in product sales. This was partially offset by a shift in sales from lower margin
products to higher margin products, lower financing fees and the impact of fixed logistics costs on higher sales.
Selling, General and Administrative Expense
(dollars in thousands)
Retail segment
Credit segment
Selling, general and administrative expense - Consolidated
Selling, general and administrative expense as a percent of total revenues
Year Ended January 31,
2021
2022
$
$
399,393
145,097
544,490
$
$
34.2 %
335,954
142,813
478,767
$
$
34.5 %
Change
63,439
2,284
65,723
The SG&A increase in the retail segment was primarily due to increases in labor and occupancy costs related to new store growth and increases in variable
expenses associated with same store sales growth. The increase was also due to increases in advertising and general operating costs.
As a percent of average total customer portfolio balance, SG&A for the credit segment for the year ended January 31, 2022 increased 260 basis points as
compared to the year ended January 31, 2021. The increase was primarily due to an increase in the corporate overhead allocated to the credit segment due
to an increase in labor costs which was partially offset by a decrease in costs being allocated to the credit segment due to the lower average customer
accounts receivable portfolio balance compared to the prior year.
Provision for Bad Debts
(dollars in thousands)
Retail segment
Credit segment
Provision for bad debts - Consolidated
Year Ended January 31,
2021
2022
$
$
479
47,705
48,184
$
$
443
201,560
202,003
$
$
Change
36
(153,855)
(153,819)
Provision for bad debts - Credit segment, as a percent of average outstanding portfolio
balance
4.2 %
14.4 %
The provision for bad debts decreased to $48.2 million for the year ended January 31, 2022 from $202.0 million for the year ended January 31, 2021, a
decrease of $153.8 million. The year-over-year decrease was primarily driven by a greater decrease in the allowance for bad debts during the year ended
January 31, 2022, compared to the decrease during the year ended January 31, 2021, and by a year-over-year decrease in net charge-offs of $100.9 million.
The decrease in the allowance for bad debts for the year ended January 31, 2022 was primarily driven by an improvement in the forecasted unemployment
rate that drove a $31.5 million decrease in the economic reserve and a decline in the customer portfolio receivable balance, partially offset by an increase in
loss rates. During the year ended January 31, 2021, the decrease in the allowance for bad debts was primarily driven by a decline in the customer accounts
receivable portfolio balance partially offset by a $42.5 million increase in the economic reserve driven by an increase in forecasted unemployment rates
stemming from the COVID-19 pandemic.
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Charges and Credits
(in thousands)
Legal and professional fees, securities-related litigation, a legal judgment and other legal
matters
Employee severance
Excess import freight costs
Year Ended January 31,
2021
2022
Change
$
$
— $
—
2,677
2,677 $
3,589 $
2,737
—
6,326 $
(3,589)
(2,737)
2,677
(3,649)
During the year ended January 31, 2022, we recognized $2.7 million of non-recurring domestic transportation costs incurred due to unprecedented
congestion in U.S. ports. During the year ended January 31, 2021, we recognized $3.6 million in professional fees associated with non-recurring expenses.
In addition, we recognized $2.7 million in severance costs related to a change in the executive management team.
Interest Expense
Interest expense decreased to $25.8 million for the year ended January 31, 2022 from $50.4 million for the year ended January 31, 2021, a decrease of
$24.6 million. The decrease was driven by a lower average outstanding balance of debt and by a lower effective interest rate.
Loss (gain) on Extinguishment of Debt
During the year ended January 31, 2022, we incurred a loss of $1.2 million related to the retirement of the remaining $141.2 million aggregate principal
amount of our 7.250% Senior Notes due 2022 ("Senior Notes") and to the amendment of our Fifth Amended and Restated Loan and Security Agreement.
During the year ended January 31, 2021, we incurred a gain of $0.4 million related to the retirement of $85.8 million aggregate principal amount of our
7.250% Senior Notes due 2022 ("Senior Notes") in connection with a tender offer.
Provision (benefit) for Income Taxes
(dollars in thousands)
Provision (benefit) for income taxes
Effective tax rate
Year Ended January 31,
2021
2022
Change
$
33,512
$
(16,190)
$
49,702
23.6 %
83.8 %
The increase in the income tax expense for the year ended January 31, 2022 compared to the year ended January 31, 2021 was primarily driven by a $161.0
million increase of pre-tax book income at the statutory rate of 21%. In addition, a benefit of $14.9 million was also recognized for the year ended January
31, 2021 as a result of net operating loss provisions within the CARES Act that provide for a five year carryback of losses.
Impact of Inflation and Changing Prices
We do not believe that inflation has had a material effect on our net sales or results of operations but we continue to monitor the impact the current rise in
inflation may have on our customers and our business. Moreover, further significant increases in oil and gasoline prices could adversely affect our
customers’ shopping decisions and payment patterns. We rely heavily on our distribution system and our next day delivery policy to satisfy our customers’
needs and desires, and increases in oil and gasoline prices could result in increased distribution costs and delivery charges. If we are unable to effectively
pass increased transportation costs on to the consumer, either by increased delivery costs or higher prices, such costs could adversely affect our results of
operations. In addition, the cost of items we purchase may increase or shortages of these items may arise as a result of changes in trade regulations,
currency fluctuations, border taxes, import tariffs, or other factors beyond our control.
Seasonality
Our business is seasonal which typically means that a higher portion of sales and operating profit are realized during the fourth quarter due primarily to the
holiday selling season. In addition, during the first quarter, our portfolio performance benefits from the timing of personal income tax refunds received by
our customers, which typically results in higher cash collection rates.
Quarterly Results of Operations
Our quarterly results may fluctuate materially depending on factors such as the following:
•
timing of new product introductions, new store openings and store relocations;
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•
•
•
•
•
•
•
•
sales contributed by new stores;
changes in our merchandise mix;
increases or decreases in comparable store sales;
changes in delinquency rates and amount of charge-offs with respect to customer accounts receivable;
the pace of growth or decline in the customer accounts receivable balance;
adverse weather conditions;
shifts in the timing of certain holidays and promotions; and
charges incurred in connection with store closures or other non-routine events.
Results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for a full fiscal year.
Customer Accounts Receivable Portfolio
We provide in-house financing to individual consumers on a short- and medium-term basis (contractual terms generally range from 12 to 36 months) for
the purchase of durable products for the home. A significant portion of our customer credit portfolio is due from customers that are considered higher-risk,
subprime borrowers. Our financing is executed using contracts that require fixed monthly payments over fixed terms. We maintain a secured interest in the
product financed. If a payment is delayed, missed or paid only in part, the account becomes delinquent. Our collection personnel attempt to contact a
customer once their account becomes delinquent. Our loan contracts generally reflect an interest rate of between 18% and 36%. We have implemented our
direct consumer loan program across all Texas, Louisiana, Tennessee and Oklahoma locations. The states of Texas, Louisiana, Tennessee and Oklahoma
represent approximately 69% of our fiscal year 2022 originations, with maximum equivalent interest rates of up to 32% in Oklahoma, up to 30% in Texas
and Tennessee, and up to 36% in Louisiana. In states where regulations do not generally limit the interest rate charged, our loan contracts generally reflect
an interest rate between 29.99% and 35.99%. These states represented 14% of our fiscal year 2022 originations.
We offer qualified customers a 12-month no-interest option finance program. If the customer is delinquent in making a scheduled monthly payment or does
not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-
interest provision and none of the interest earned is waived.
We regularly extend or “re-age” a portion of our delinquent customer accounts as a part of our normal collection procedures to protect our investment.
Generally, extensions are granted to customers who have experienced a financial difficulty (such as the temporary loss of employment), which is
subsequently resolved, and when the customer indicates a willingness and ability to resume making monthly payments. These re-ages involve modifying
the payment terms to defer a portion of the cash payments currently required of the debtor to help the debtor improve his or her financial condition and
eventually be able to pay the account balance. Our re-aging of customer accounts does not change the interest rate or the total principal amount due from
the customer and typically does not reduce the monthly contractual payments. We may also charge the customer an extension fee, which approximates the
interest owed for the time period the contract was past due. Our re-age programs consist of extensions and two payment updates, which include unilateral
extensions to customers who make two full payments in three calendar months in certain states. During the second quarter of fiscal year 2021, we changed
our re-age policy to increase the number of days required for a customer to qualify for a unilateral re-age. Re-ages are not granted to debtors who
demonstrate a lack of intent or ability to service the obligation or have reached our limits for account re-aging. To a much lesser extent, we may provide the
customer the ability to re-age their obligation by refinancing the account, which typically does not change the interest rate or the total principal amount due
from the customer but does reduce the monthly contractual payments and extends the term. Under these options, as with extensions, the customer must
resolve the reason for delinquency and show a willingness and ability to resume making contractual monthly payments.
On March 27, 2020 the CARES Act was signed into law to address the economic impact of the COVID-19 pandemic. Under the CARES Act,
modifications deemed to be COVID-19 related are not considered a TDR if the loan was current (not more than 30 days past due as of March 31, 2020) and
the deferral was executed between April 1, 2020 and the earlier of 60 days after the termination of the COVID-19 national emergency or December 31,
2020. In response to the CARES Act, the Company implemented short-term deferral programs for our customers. The carrying value of the customer
receivables on accounts which were current prior to receiving a COVID-19 related deferment was $18.9 million as of January 31, 2022. All COVID-19
specific deferral programs ended during the third quarter of fiscal year 2021.
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The following tables present, for comparison purposes, information about our managed portfolio (information reflects on a combined basis the securitized
receivables transferred to the VIEs and receivables not transferred to the VIEs):
(1)
Weighted average credit score of outstanding balances
Average outstanding customer balance
Balances 60+ days past due as a percentage of total customer portfolio carrying value
Re-aged balance as a percentage of total customer portfolio carrying value
Carrying value of account balances re-aged more than six months (in thousands)
Allowance for bad debts and uncollectible interest as a percentage of total customer accounts
receivable portfolio balance
Percent of total customer accounts receivable portfolio balance represented by no-interest option
receivables
(2)(3)(4)
(2)(3)(5)
(3)
(7)
(6)
2022
606
2,498
10.4 %
16.8 %
50,282
$
$
$
$
18.5 %
33.7 %
January 31,
2021
600
2,463
12.4 %
25.9 %
92,883
$
$
24.2 %
20.5 %
Total applications processed
Weighted average origination credit score of sales financed
Percent of total applications approved and utilized
Average income of credit customer at origination
Percent of retail sales paid for by:
(1)
In-house financing, including down payments received
Third-party financing
Third-party lease-to-own option
2022
1,297,025
616
21.8 %
Year Ended January 31,
2021
1,251,002
615
21.5 %
$
49,100
$
47,100
$
51.0 %
17.7 %
10.4 %
79.1 %
52.1 %
20.4 %
8.5 %
81.0 %
2020
591
2,734
12.5 %
29.4 %
112,410
14.6 %
17.7 %
2020
1,235,712
608
27.0 %
45,800
67.6 %
17.8 %
7.0 %
92.4 %
(1) Credit scores exclude non-scored accounts.
(2) Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.
(3) Carrying value reflects the total customer accounts receivable portfolio balance, net of deferred fees and origination costs, the allowance for no-interest
option credit programs and the allowance for uncollectible interest.
(4) Decrease was primarily due to an increase in cash collections that occurred in fiscal year 2022 and the tightening of underwriting standards that
occurred in fiscal year 2021.
(5) Decrease was primarily due to an increase in cash collections, the change in the unilateral re-age policy that occurred in the second quarter of fiscal
year 2021 and the tightening of underwriting standards that occurred in fiscal year 2021.
(6) For the periods ended January 31, 2022 and January 31, 2021, the allowance for bad debts and uncollectible interest is based on the current expected
credit loss methodology required under ASC 326. For the period ended January 31, 2020, the allowance for bad debts and uncollectible interest is
based on the incurred loss methodology.
(7) Increase is due to a shift in underwriting strategy that occurred in the first quarter of fiscal year 2022.
Our customer portfolio balance and related allowance for uncollectible accounts are segregated between customer accounts receivable and restructured
accounts. Customer accounts receivable include all accounts for which payment term has not been cumulatively extended over three months or refinanced.
Restructured accounts includes all accounts for which payment term has been re-aged in excess of three months or refinanced.
For customer accounts receivable (excluding restructured accounts), the allowance for uncollectible accounts as a percentage of the total customer accounts
receivable portfolio balance decreased to 16.1% as of January 31, 2022 from 21.0% as of January 31, 2021. The decrease in our allowance for uncollectible
accounts was primarily related to a decline in the non-TDR re-age balance, improvements in 60+ day delinquencies and a decrease in the economic
adjustment due to an improved macroeconomic outlook.
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The percentage of the carrying value of non-restructured accounts greater than 60 days past due decreased 40 basis points over the prior year period to
8.5% as of January 31, 2022 from 8.9% as of January 31, 2021.
For restructured accounts, the allowance for uncollectible accounts as a percentage of the restructured portfolio balance was 42.0% as of January 31, 2022
as compared to 41.6% as of January 31, 2021. The increase is primarily due to an increase in the loss rate on restructured accounts.
The percent of bad debt charge-offs, net of recoveries, to average outstanding portfolio balance was 11.1% for fiscal year 2022 compared to 16.3% for
fiscal year 2021. The decrease in bad debt charge-offs, net of recoveries, was primarily due to increased cash collections and the tightening of underwriting
standards that occurred in fiscal year 2021.
As of January 31, 2022 and 2021, balances under no-interest programs included within customer receivables were $380.4 million and $252.8 million,
respectively. This increase is due to a shift in the underwriting strategy that occurred in the first quarter of fiscal year 2022.
Liquidity and Capital Resources
We require liquidity and capital resources to finance our operations and future growth as we add new stores to our operations, which in turn requires
additional working capital for increased customer receivables and inventory. We generally finance our operations through a combination of cash flow
generated from operations, the use of our Revolving Credit Facility, and through periodic securitizations of originated customer receivables. We plan to
execute periodic securitizations of future originated customer receivables.
We believe, based on our current projections, that we have sufficient sources of liquidity to fund our operations, store expansion and renovation activities,
and capital expenditures for at least the next 12 months.
Operating cash flows. For the year ended January 31, 2022, net cash provided by operating activities was $176.4 million compared to $462.1 million for
the year ended January 31, 2021. The decrease in net cash provided by operating activities was primarily driven by an increase in inventory in comparison
to the prior year period when we were preserving liquidity in the midst of the COVID-19 pandemic, higher prior year collections due to a higher customer
accounts receivable balance compared to the current year period and a decrease in net income when adjusted for non-cash activity.
For the year ended January 31, 2021, net cash provided by operating activities was $462.1 million compared to $80.1 million for the year
ended January 31, 2020. The increase in net cash provided by operating activities was primarily driven by a decrease in receivables resulting from both an
increase in collections on customer accounts and a decrease in loan originations, a decrease in inventory driven by industry wide supply chain disruptions
in certain product categories and the general timing of payments. These increases were partially offset by a decrease in net income when adjusted for non-
cash activity.
Investing cash flows. For the year ended January 31, 2022, net cash used in investing activities was $44.9 million compared to $55.9 million for the year
ended January 31, 2021. The cash used during the year ended January 31, 2022 was primarily for investments in new stores and technology investments.
For the year ended January 31, 2021, net cash used in investing activities was $55.9 million compared to $56.8 million for the year ended January 31, 2020.
The cash used during the year ended January 31, 2021 was primarily for investments in new stores, two new distribution centers and technology
investments. The cash used during the year ended January 31, 2020 was primarily for investments in new stores, renovations and expansions of select
existing stores and a new distribution center.
Financing cash flows. For the year ended January 31, 2022, net cash used in financing activities was $152.2 million compared to net cash used in
financing activities of $426.8 million for the year ended January 31, 2021 and net cash used in financing activities of $7.3 million for the year
ended January 31, 2020. During the year ended January 31, 2022, we issued 2020-A Class C VIE asset backed notes and 2021-A VIE asset backed notes
resulting in net proceeds to us of approximately $62.5 million and $375.2 million, net of transaction costs, respectively. The proceeds from the asset-backed
notes were used to pay down the balance of the Company’s Revolving Credit Facility and for other general corporate purposes. Cash collections from the
securitized receivables were used to make payments on the asset-backed notes of approximately $483.9 million during the year ended January 31, 2022
compared to approximately $599.1 million in the comparable prior year period. During the year ended January 31, 2022, net borrowings under our
Revolving Credit Facility were $97.0 million compared to net borrowings of $22.9 million during the year ended January 31, 2021. During the year ended
January 31, 2022, we retired the remaining $141.2 million aggregate principal amount of our Senior Notes outstanding. During the year ended January 31,
2021, we retired $85.8 million aggregate principal amount of our Senior Notes in connection with a tender offer, resulting in a payment on extinguishment
of debt of $84.3 million, net of transaction costs paid.
During the year ended January 31, 2021, we issued 2020-A VIE asset backed notes resulting in net proceeds to us of approximately $238.5 million, net of
transaction costs. The proceeds from the 2020-A VIE asset-backed notes were used to pay down the balance of the Company’s Revolving Credit Facility
outstanding at the time of issuance and for other general corporate purposes. During the year ended January 31, 2020, we issued 2019-A VIE and 2019-B
VIE asset-backed notes
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resulting in net proceeds to us of approximately $862.0 million, net of transaction costs and restricted cash held by the Issuer, which were used to pay down
the balance of the Company’s Revolving Credit Facility outstanding at the time of issuance and for other general corporate purposes.
Share Repurchase Program. On December 14, 2021, our Board of Directors approved a stock repurchase program pursuant to which we had the
authorization to repurchase up to $150 million of our outstanding common stock. The stock repurchase program expires on December 14, 2022. For the
year ended January 31, 2022, we repurchased 2,603,479 shares of our common stock at an average weighted cost per share of $22.61 for an aggregate
amount of $58.9 million.
Senior Notes. On July 1, 2014, we issued $250.0 million of the unsecured Senior Notes due July 2022 bearing interest at 7.25%, pursuant to an indenture
dated July 1, 2014 (as amended, the “Indenture”), among Conn’s, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National Association, as
trustee. On April 15, 2021 we completed the redemption of all of our outstanding Senior Notes in an aggregate principal amount of $141.2 million.
Asset-backed Notes. From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In
turn, the VIEs issue asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.
Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the
holders of issued notes, and then to us as the holder of non-issued notes, if any, and residual equity. We retain the servicing of the securitized portfolios and
receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all
credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized
receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.
The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under
the Securities Act. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding
amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would
instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely
to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no
recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or
specified bankruptcy-related events.
The asset-backed notes outstanding as of January 31, 2022 consisted of the following:
(dollars in thousands)
Asset-Backed Notes
2020-A Class A Notes
2020-A Class B Notes
2020-A Class C Notes
2021-A Class A Notes
2021-A Class B Notes
2021-A Class C Notes
Total
Original
Principal
Amount
Original Net
(1)
Proceeds
Current
Principal
Amount
$
$
174,900 $
65,200
62,900
247,830
66,090
63,890
680,810 $
173,716 $
64,754
62,535
246,152
65,635
63,450
676,242 $
9,184
18,342
17,695
195,595
66,090
63,890
370,796
Issuance Date
10/16/2020
10/16/2020
2/24/2021
11/23/2021
11/23/2021
11/23/2021
Maturity
Date
6/16/2025
6/16/2025
6/16/2025
5/15/2026
5/15/2026
5/15/2026
Contractual
Interest Rate
1.71%
4.27%
4.20%
1.05%
2.87%
4.59%
Effective
Interest Rate
(2)
4.47%
5.51%
5.72%
2.43%
3.36%
5.07%
(1) After giving effect to debt issuance costs.
(2) For the year ended January 31, 2022, and inclusive of the impact of changes in timing of actual and expected cash flows.
On February 24, 2021, the Company completed the sale of $62.9 million aggregate principal amount of 4.20% Asset Backed Notes, Class C, Series 2020-
A, which were previously issued and held by the Company. The asset-backed notes are secured by the transferred customer accounts receivables and
restricted cash held by a consolidated VIE, which resulted in net proceeds to us of $62.5 million, net of debt issuance costs. Net proceeds from the sale
were used to repay amounts outstanding under the Company’s Revolving Credit Facility.
On May 12, 2021, the Company completed the redemption of the 2019-A Asset Backed Notes at an aggregate redemption price of $41.1 million (which
was equal to the entire outstanding principal balance plus accrued interest).
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On November 23, 2021, the Company completed the issuance and sale of $377.8 million aggregate principal amount of asset-backed notes secured by the
transferred customer accounts receivables and restricted cash held by a consolidated VIE, which resulted in net proceeds to us of $375.2 million, net of debt
issuance costs. Net proceeds from the offering were used to repay indebtedness under the Company’s Revolving Credit Facility, as defined below, and for
other general corporate purposes. The asset-backed notes mature on May 15, 2026 and consist of $247.8 million of 1.05% Asset Backed Fixed Rate Notes,
Class A, Series 2021-A, $66.1 million of 2.87% Asset Backed Fixed Rate Notes, Class B, Series 2021-A, and $63.9 million of 4.59% Asset Backed Fixed
Rate Notes, Class C, Series 2021-A Asset Backed Fixed Rate Notes.
On December 30, 2021 the Company completed the redemption of the 2019-B Asset Backed Notes at an aggregate redemption price of $52.4 million
(which was equal to the entire outstanding principal balance plus accrued interest).
Revolving Credit Facility. On March 29, 2021, Conn’s, Inc. and certain of its subsidiaries (the “Borrowers”) entered into the Fifth Amended and Restated
Loan and Security Agreement (the “Fifth Amended and Restated Loan Agreement”), with certain lenders, which provides for a $650.0 million asset-based
revolving credit facility (as amended, the “Revolving Credit Facility”) under which credit availability is subject to a borrowing base and a maturity date of
March 29, 2025.
The Fifth Amended and Restated Loan Agreement, among other things, permits borrowings under the Letter of Credit Subline (as defined in the Fifth
Amended and Restated Loan Agreement) that exceed the cap of $40 million to $100 million, solely at the discretion of the lenders for such amounts in
excess of $40 million. The obligations under the Revolving Credit Facility are secured by substantially all assets of the Company, excluding the assets of
the VIEs. As of January 31, 2022, we had immediately available borrowing capacity of $352.2 million under our Revolving Credit Facility, net of standby
letters of credit issued of $22.5 million.
Loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 2.50% to 3.25% per annum
(depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum
(depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the
federal funds effective rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. We also pay an unused fee on the portion of the commitments that
is available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.50% per annum, depending on the average outstanding balance and
letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and
including unused line fees under the Revolving Credit Facility was 4.0% for the year ended January 31, 2022.
The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests,
dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make
dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make
distributions to the Company and other obligors under the Revolving Credit Facility without restriction. As of January 31, 2022, we were restricted from
making distributions in excess of $225.9 million as a result of the Revolving Credit Facility distribution and payment restrictions. The Revolving Credit
Facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit
Facility.
Debt Covenants. We were in compliance with our debt covenants at January 31, 2022. A summary of the significant financial covenants that govern our
Revolving Credit Facility compared to our actual compliance status at January 31, 2021 is presented below:
Interest Coverage Ratio for the quarter must equal or exceed minimum
Interest Coverage Ratio for the trailing two quarters must equal or exceed minimum
Leverage Ratio must not exceed maximum
ABS Excluded Leverage Ratio must not exceed maximum
Capital Expenditures, net, must not exceed maximum
Actual
8.35:1.00
9.29:1.00
1.38:1.00
0.83:1.00
$30.7 million
Required
Minimum/
Maximum
1.00:1.00
1.50:1.00
4.50:1.00
2.50:1.00
$100.0 million
All capitalized terms in the above table are defined by the Revolving Credit Facility and may or may not agree directly to the financial statement captions
in this document. The covenants are calculated quarterly, except for capital expenditures, which is calculated for a period of four consecutive fiscal
quarters, as of the end of each fiscal quarter.
Capital Expenditures. We lease the majority of our stores under operating leases, and our plans for future store locations anticipate operating leases, but
do not exclude store ownership. Our capital expenditures for future new store projects should primarily be for our tenant improvements to the property
leased (including any new distribution centers and cross-dock facilities), the cost of which is estimated to be between $1.5 million and $2.7 million per
store (before tenant improvement
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allowances), and for our existing store remodels, estimated to range between $0.3 million and $0.9 million per store remodel (before tenant improvement
allowances), depending on store size. In the event we purchase existing properties, our capital expenditures will depend on the particular property and
whether it is improved when purchased. We are continuously reviewing new relationships and funding sources and alternatives for new stores, which may
include “sale-leaseback” or direct “purchase-lease” programs, as well as other funding sources for our purchase and construction of those projects. If we do
not purchase the real property for new stores, our direct cash needs should include only our capital expenditures for tenant improvements to leased
properties and our remodel programs for existing stores. We opened 12 new stores during fiscal year 2022, and currently plan to open 13 to 16 new stores
during fiscal year 2023. Additionally, we plan to renovate several of our stores during fiscal year 2023. Our anticipated capital expenditures for fiscal year
2023 are between $90.0 and $100.0 million, which is primarily related to new store construction, existing store remodels, opening new distribution centers
for geographic expansion and technology investments.
Cash Flow. We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans,
debt service requirements and other operating cash needs. To meet our short- and long-term liquidity requirements, including payment of operating
expenses, funding of capital expenditures and repayment of debt, we rely primarily on cash from operations. As of January 31, 2022, beyond cash
generated from operations we had (i) immediately available borrowing capacity of $352.2 million under our Revolving Credit Facility and (ii) $7.7 million
of cash on hand. However, we have, in the past, sought to raise additional capital.
We expect that for the next 12 months and the foreseeable future, cash generated from operations, proceeds from potential accounts receivable
securitizations and our Revolving Credit Facility will be sufficient to provide us the ability to fund our operations, provide the increased working capital
necessary to support our strategy and fund capital expenditures as discussed above in Capital Expenditures.
We may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our financial position. These actions could
include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and opportunistic refinancing of debt. The amount of
debt that may be repurchased or otherwise retired, if any, will depend on market conditions, the Company’s cash position, compliance with debt covenant
and restrictions and other considerations.
Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. The following table presents a summary of our
minimum contractual commitments and obligations as of January 31, 2022:
(1)
(in thousands)
Debt, including estimated interest payments:
Revolving Credit Facility
(2)
2020-A Class A Notes
2020-A Class B Notes
2020-A Class C Notes
2021-A Class A Notes
2021-A Class B Notes
2021-A Class C Notes
Financing lease obligations
Operating leases:
(2)
(2)
(2)
(2)
(2)
Real estate
Equipment
Contractual commitments
(3)
Total
Total
Less Than 1
Year
1-3
Years
3-5
Years
More Than
5 Years
Payments due by period
$
$
161,356 $
9,713
20,985
20,202
204,401
74,223
76,464
7,876
3,911 $
157
783
743
2,054
1,897
2,933
1,197
7,823 $
314
1,566
1,486
4,107
3,794
5,865
2,371
506,296
105
95,853
1,177,474 $
86,856
70
89,802
190,403 $
159,143
27
5,826
192,322 $
149,622 $
9,242
18,636
17,973
198,240
68,532
67,666
1,369
115,617
8
225
647,130 $
—
—
—
—
—
—
—
2,939
144,680
—
—
147,619
(1) Estimated interest payments are based on the outstanding balance as of January 31, 2022 and the interest rate in effect at that time.
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(2) The payments due by period for the asset-backed notes were based on their respective maturity dates at their respective fixed annual interest rate.
Actual principal and interest payments on the asset-backed notes will reflect actual proceeds from the securitized customer accounts receivables.
(3) Contractual commitments primarily include commitments to purchase inventory of $75.7 million.
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Issuer and Guarantor Subsidiary Summarized Financial Information
Conn’s, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. As of January 31, 2022, the direct
or indirect subsidiaries of Conn’s, Inc. that were not Guarantors (the “Non-Guarantor Subsidiaries”) were the VIEs and minor subsidiaries. There are no
restrictions under the Indenture on the ability of any of the Guarantors to transfer funds to Conn’s, Inc. in the form of dividends or distributions.
The following tables present on a combined basis for the Issuer and the Guarantor Subsidiaries, a summarized Balance Sheet as of January 31, 2022 and a
summarized Statement of Operations on a consolidated basis for the twelve months ended January 31, 2022. The information presented below excludes
eliminations necessary to arrive at the information on a consolidated basis. Investments in subsidiaries are accounted for by the parent company using the
equity method for purposes of this presentation. Amounts provided do not represent our total consolidated amounts, as of January 31, 2022 and for the
twelve months ended January 31, 2022:
(in thousands)
Assets
Cash, cash equivalents and restricted cash
Customer accounts receivable, net of allowances
Inventories
Net due from non-guarantor subsidiary
Other current assets
Total current assets
Long-term portion of customer accounts receivable, net of allowances
Property and equipment, net
Right of use assets, net
Other assets
Total assets
Liabilities
Current portion of debt
Lease liability operating - current
Other liabilities
Total current liabilities
Lease liability operating - non current
Long-term debt
Other long-term liabilities
Total liabilities
(in thousands)
Revenues:
Net sales and finances charges
Servicing fee revenue from non-guarantor subsidiary
Total revenues
Total costs and expenses
Net income
51
January 31,
2022
9,765
243,527
246,826
14,903
78,556
593,577
264,527
192,763
256,267
52,199
1,359,333
889
54,534
200,326
255,749
330,439
154,224
26,889
767,301
Year Ended
January 31, 2021
1,500,510
44,177
1,544,687
1,484,264
60,423
$
$
$
$
$
$
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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make estimates that affect the reported
amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Certain accounting policies, as described below,
are considered “critical accounting policies” because they are particularly dependent on estimates made by us about matters that are inherently uncertain
and could have a material impact to our consolidated financial statements. We base our estimates on historical experience and on other assumptions that we
believe are reasonable. As a result, actual results could differ because of the use of estimates. A summary of all of our significant accounting policies is
included in Note 1, Summary of Significant Accounting Policies, of the Consolidated Financial Statements in Part II, Item 8., of this Annual Report on
Form 10-K.
Allowance for doubtful accounts. The determination of the amount of the allowance for credit losses is, by nature, highly complex and subjective. Future
events that are inherently uncertain could result in material changes to the level of the allowance for credit losses. General economic conditions, changes to
state or federal regulations and a variety of other factors that affect the ability of borrowers to service their debts or our ability to collect will impact the
future performance of the portfolio.
We establish an allowance for credit losses, including estimated uncollectible interest, to cover expected credit losses on our customer accounts receivable
resulting from the failure of customers to make contractual payments. Our customer accounts receivable portfolio balance consists of a large number of
relatively small, homogeneous accounts. None of our accounts are large enough to warrant individual evaluation for impairment.
On February 1, 2021, we adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASC 326”). The allowance for credit losses is measured on a collective (pool) basis where similar risk characteristics exist. The allowance for credit
losses is determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis.
We have elected to use a risk-based, pool-level segmentation framework to calculate the expected loss rate. This framework is based on our historical gross
charge-off history. In addition to adjusted historical gross charge-off rates, estimates of post-charge-off recoveries, including cash payments from
customers, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance and repair service agreement (“RSA”) policies are
also considered. We also consider forward-looking economic forecasts based on a statistical analysis of economic factors (specifically, forecast of
unemployment rates over the reasonable and supportable forecasting period). To the extent that situations and trends arise which are not captured in our
model, management will layer on additional qualitative adjustments.
Pursuant to ASC 326 requirements, the Company uses a 24-month reasonable and supportable forecast period for the Customer Accounts Receivable
portfolio. We estimate losses beyond the 24-month forecast period based on historic loss rates experienced over the life of our historic loan portfolio by
loan pool type. We revisit our measurement methodology and assumption annually, or more frequently if circumstances warrant.
As of January 31, 2022 and 2021, the balance of allowance for doubtful accounts and uncollectible interest for non-TDR customer receivables was $165.0
million and $219.7 million, respectively. As of January 31, 2022 and 2021, the amount included in the allowance for doubtful accounts associated with
principal and interest on TDR accounts was $44.0 million and $78.3 million, respectively. A 100 basis point increase in our estimated gross charge-off rate
would increase our allowance for doubtful accounts on our customer accounts receivable by $7.3 million based on the balance outstanding at January 31,
2022.
Interest income on customer accounts receivable. Interest income, which includes interest income and amortization of deferred fees and origination costs,
is recorded using the interest method and is reflected in finance charges and other revenues. Typically, interest income is recorded until the customer
account is paid off or charged-off, and we provide an allowance for estimated uncollectible interest. Any contractual interest income received from
customers in excess of the interest income calculated using the interest method is recorded as deferred revenue on our balance sheets. At January 31, 2022
and 2021, there were $8.6 million and $8.9 million, respectively, of deferred interest included in deferred revenues and other credits and other long-term
liabilities. The deferred interest will ultimately be brought into income as the accounts pay off or charge-off.
We offer a 12-month no-interest option program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in
full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of
the interest earned is waived. Interest income is recognized based on estimated accrued interest earned to date on all no-interest option finance programs
with an offsetting reserve for those customers expected to satisfy the requirements of the program based on our historical experience.
We recognize 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
equals the present value of expected future cash flows.
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We place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the amount
of the loan. At January 31, 2022 and 2021, the carrying value of customer accounts receivable in non-accrual status was $5.9 million and $8.5 million. At
January 31, 2022 and 2021, the carrying value of customer accounts receivable that were past due 90 days or more and still accruing interest totaled $84.1
million and $111.5 million, respectively. At January 31, 2022 and 2021, the carrying value of customer accounts receivable in a bankruptcy status that were
less than 60 days past due of $5.5 million and $5.2 million, respectively, were included within the customer receivables balance carried in non-accrual
status.
Inventories. Inventories consist of merchandise purchased for resale and service parts and are recorded at the lower of cost or net realizable value. The
carrying value of the inventory is reduced to its net realizable value for any product lines with excess of carrying amount, typically weighted-average cost,
over the amount we expect to realize from the ultimate sale or other disposition of the inventory, with a corresponding charge to cost of sales. The write-
down of inventory to net realizable value is estimated based on assumptions regarding inventory aging and historical product sales. A 10% difference in our
actual inventory reserve at January 31, 2022, would have affected our cost of goods sold by $0.3 million.
Impairment of Long-Lived Assets. Long-lived assets are evaluated for impairment, primarily at the asset group level. The asset group is defined as stores
and cross-docks within a distribution center’s service area. We monitor asset group performance in order to assess if events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The most likely condition that would necessitate an assessment would be an adverse
change in historical and estimated future results of an asset group's performance. For property and equipment held and used, we recognize an impairment
loss if the carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the
carrying amount and estimated fair value. During the year ended January 31, 2020, we recognized $3.2 million in impairments from the exiting of certain
leases. See Note 4, Charges and Credits, for details. For the years ended January 31, 2022 and 2021 there were no impairments.
Vendor allowances. We receive funds from vendors for price protection, product rebates (earned upon purchase or sale of product), marketing, and
promotion programs, collectively referred to as vendor allowances, which are recorded on an accrual basis. We estimate the vendor allowances to accrue
based on the progress of satisfying the terms of the programs based on actual and projected sales or purchase of qualifying products. If the programs are
related to product purchases, the vendor allowances are recorded as a reduction of product cost in inventory still on hand with any remaining amounts
recorded as a reduction of cost of goods sold. During the years ended January 31, 2022, 2021 and 2020, we recorded $118.1 million, $122.7 million and
$156.6 million, respectively, as reductions in cost of goods sold from vendor allowances.
Recent Accounting Pronouncements
The information related to recent accounting pronouncements as set forth in Note 1, Summary of Significant Accounting Policies, of the Consolidated
Financial Statements in Part II, Item 8., of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in interest rates. We have not been
materially impacted by fluctuations in foreign currency exchange rates, as substantially all of our business is transacted in, and is expected to continue to be
transacted in, U.S. dollars or U.S. dollar-based currencies. Our Senior Notes and asset-backed notes bear interest at a fixed rate and would not be affected
by interest rate changes.
Loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 2.50% to 3.25% per annum
(depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum
(depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the
federal funds effective rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. We also pay an unused fee on the portion of the commitments that
is available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.50% per annum, depending on the average outstanding balance and
letters of credit on the Revolving Credit Facility in the immediately preceding quarter. Accordingly, changes in our total leverage ratio and LIBOR or the
alternate base rate will affect the interest rate on, and therefore our costs under, the Revolving Credit Facility. As of January 31, 2022, the balance
outstanding under our Revolving Credit Facility was $149.0 million. A 100 basis point increase in interest rates on the Revolving Credit Facility would
increase our borrowing costs by $1.5 million over a 12-month period, based on the balance outstanding at January 31, 2022.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
54
Page No.
55
57
58
59
60
61
Table of Contents
To the Stockholders and the Board of Directors of Conn’s, Inc.
Opinion on the Financial Statements
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Conn’s, Inc. and subsidiaries (the “Company”) as of January 31, 2022 and 2021, the
related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2022, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 31, 2022 and 2021, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the
Company's internal control over financial reporting as of January 31, 2022, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 29, 2022 expressed an
unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
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Description of the Matter
How We Addressed the Matter
in Our Audit
Allowance for Credit Losses
At January 31, 2022 the Company’s balance of customer accounts receivable was $1.13 billion and the related allowance for
credit losses was $193.9 million. As discussed in Note 1 to the consolidated financial statements, the Company recognizes
an allowance for expected credit losses over the life of customer accounts receivable. Management measures expected
losses on a pool basis where similar risk characteristics exist using historical charge-off experience to estimate an
allowance. In addition to adjusted historical gross charge-off rates, estimates of post-charge-off recoveries as well as
forward-looking macro-economic forecasts are also considered. To the extent that situations and trends arise which are not
captured in management’s model, management will layer on additional qualitative adjustments.
Auditing management’s estimates of the allowance for credit losses for customer accounts receivable involves a high degree
of complexity in testing the model and modeling assumptions used to derive the segmentation level loss estimates utilized in
the allowance calculation. Additionally, in light of the current economic environment, auditing the estimate is complex due
to the judgments necessary to evaluate management’s qualitative assessments of how to adjust the historical charge-off and
recovery experiences, as well as the macro-economic forecast to estimate current expected credit losses over the life of the
customer accounts receivable portfolio.
We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over
the allowance for credit losses process, including management’s review and approval of models used to calculate the
estimate and the evaluation of the completeness and accuracy of data inputs, assumptions, and outputs of those models. We
also evaluated the Company’s controls over the identification and measurement of qualitative adjustments, review of
portfolio trends, and overall evaluation of the recorded allowance estimate.
With the assistance of our specialists, we tested the quantitative model methodology, modeling assumptions, model
calculation and clerical accuracy of the segmentation level loss estimates. We tested the completeness and accuracy of
historical data. We evaluated management’s identification of historical loss periods used in the models. We also assessed
management’s adjustments to historical loss data and evaluated whether those adjustments were reflective of management’s
current expected loss estimates, and consistent with the underlying supporting documentation for any such quantitative
adjustments. We evaluated the inputs used by management in determining the qualitative adjustments for consistency with
management’s evaluation framework. We tested the completeness and accuracy of underlying portfolio and macro-
economic data considered by management in determining the qualitative adjustments. We also inspected management’s
documentation of the evaluation of adjustments considered for consistency with the underlying data and evaluated the
reasonableness of the qualitative adjustments recorded. We evaluated the reasonableness of the overall allowance estimate,
inclusive of the adjustments for qualitative factors, through comparison of historical estimation results to actual recorded
losses. We also reviewed subsequent events and transactions and considered whether they corroborated or contradicted the
Company’s estimation conclusion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2001.
Houston, Texas
March 29, 2022
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CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
January 31,
2022
2021
Assets
Current assets:
Cash and cash equivalents
Restricted cash (includes VIE balances of $29,872 and $48,622, respectively)
Customer accounts receivable, net of allowance (includes VIE balances of $212,259 and $259,811, respectively)
Other accounts receivable
Inventories
Income taxes receivable
Prepaid expenses and other current assets
Total current assets
Long-term portion of customer accounts receivable, net of allowances (includes VIE balances of $167,905 and
$184,304, respectively)
Property and equipment, net
Operating lease right-of-use assets
Deferred income taxes
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Current finance lease obligations
Accounts payable
Accrued compensation and related expenses
Accrued expenses
Operating lease liability - current
Income taxes payable
Deferred revenues and other credits
Total current liabilities
Operating lease liability - non current
Long-term debt and finance lease obligations (includes VIE balances of $367,925 and $411,551 respectively)
Deferred tax liability
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding)
Common stock (0.01 par value, 100,000,000 shares authorized; 33,015,053 and 32,711,623 shares issued,
respectively)
Treasury stock (at cost; 6,088,920 shares and 3,485,441 shares, respectively)
Additional paid-in capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
57
$
7,707 $
31,930
455,787
63,055
246,826
6,745
8,756
820,806
432,431
192,763
256,267
—
52,199
1,754,466 $
889 $
74,705
36,677
73,035
54,534
3,007
15,569
258,416
330,439
522,149
7,351
21,292
1,139,647
9,703
50,557
478,734
61,716
196,463
38,059
8,831
844,063
430,749
190,962
265,798
9,448
14,064
1,755,084
934
69,367
24,944
58,046
44,011
1,447
13,007
211,756
354,598
608,635
—
22,940
1,197,929
—
—
330
(125,145)
140,419
599,215
614,819
1,754,466 $
327
(66,290)
132,108
491,010
557,155
1,755,084
$
$
$
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CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Revenues:
Product sales
Repair service agreement commissions
Service revenues
Total net sales
Finance charges and other revenues
Total revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expense
Provision for bad debts
Charges and credits
Total costs and expenses
Operating income
Interest expense
Loss (gain) on extinguishment of debt
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
Year Ended January 31,
2021
2022
2020
1,205,545 $
89,101
10,743
1,305,389
284,642
1,590,031
825,987
544,490
48,184
2,677
1,421,338
168,693
25,758
1,218
141,717
33,512
108,205 $
973,031 $
78,838
12,442
1,064,311
321,714
1,386,025
668,315
478,767
202,003
6,326
1,355,411
30,614
50,381
(440)
(19,327)
(16,190)
(3,137) $
1,042,424
106,997
13,814
1,163,235
380,451
1,543,686
697,784
503,024
205,217
3,142
1,409,167
134,519
59,107
1,094
74,318
18,314
56,004
3.70 $
3.61 $
(0.11) $
(0.11) $
1.85
1.82
29,267,691
30,001,490
29,060,512
29,060,512
30,275,662
30,814,775
See notes to consolidated financial statements.
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Balance January 31, 2019
Adoption of ASU 2016-02
Exercise of options and vesting of
restricted stock, net of withholding
tax
Issuance of common stock under
Employee Stock Purchase Plan
Stock-based compensation
Common stock repurchase
Net income
Balance January 31, 2020
Adoption of ASU 2016-13
Exercise of options and vesting of
restricted stock, net of withholding
tax
Issuance of common stock under
Employee Stock Purchase Plan
Stock-based compensation
Net loss
Balance January 31, 2021
Exercise of options and vesting of
restricted stock, net of withholding
tax
Issuance of common stock under
Employee Stock Purchase Plan
Stock-based compensation
Common stock repurchase
Net income
CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for number of shares)
Common Stock
Amount
Shares
31,788,162 $
—
Additional
Paid-in
Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Total
318 $
—
111,185 $
—
508,472
6,160
— $
—
— $
—
619,975
6,160
283,434
2
(1,987)
—
—
—
(1,985)
53,459
—
—
—
32,125,055 $
—
445,895
140,673
—
—
32,711,623 $
1
—
—
—
321 $
—
765
12,550
—
—
122,513 $
—
—
—
—
56,004
570,636
(76,489)
5
(1,687)
—
1
—
—
327 $
697
10,585
—
132,108 $
—
—
(3,137)
491,010
—
—
(3,485,441)
—
(3,485,441) $
—
—
—
—
—
(3,485,441) $
—
—
(66,290)
—
(66,290) $
—
766
12,550
(66,290)
56,004
627,180
(76,489)
—
(1,682)
—
—
—
(66,290) $
698
10,585
(3,137)
557,155
252,168
2
(1,412)
—
—
—
(1,410)
51,262
—
—
—
1
—
—
—
330 $
808
8,915
—
—
140,419 $
—
—
—
108,205
599,215
—
—
(2,603,479)
—
—
—
(58,855)
—
(6,088,920) $
(125,145) $
809
8,915
(58,855)
108,205
614,819
Balance January 31, 2022
33,015,053 $
See notes to consolidated financial statements.
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CONN’S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
Change in right-of-use asset
Amortization of debt issuance costs
Provision for bad debts and uncollectible interest
Stock-based compensation expense
Charges, net of credits
Deferred income taxes
Loss (gain) on early termination of debt
Loss from disposal of property and equipment
Tenant improvement allowances received from landlords
Change in operating assets and liabilities:
Customer accounts receivable
Other accounts receivables
Inventories
Other assets
Accounts payable
Accrued expenses
Operating leases
Income taxes
Deferred revenues and other credits
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from asset dispositions
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of asset-backed notes
Payments on asset-backed notes
Borrowings under revolving credit facility
Payments on revolving credit facility
Payments on warehouse facility
Payment for share repurchases
Payment of debt issuance costs and amendment fees
Proceeds from stock issued under employee stock purchase plan
Tax payments associated with equity-based compensation transactions
Payment for extinguishment of debt
Other
Net cash used in financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
2022
Year Ended January 31,
2021
2020
$
108,205 $
(3,137) $
56,004
45,450
35,186
5,485
84,286
8,915
2,677
16,799
1,218
258
14,143
(62,543)
(1,818)
(50,363)
1,081
5,338
19,325
(53,435)
(4,687)
882
176,402
(44,859)
—
(44,859)
41,068
29,956
8,527
265,929
9,330
6,326
31,323
(440)
497
21,224
63,871
6,595
23,293
393
17,507
15,905
(40,384)
(35,270)
(398)
462,115
(55,927)
—
(55,927)
440,710
(483,904)
1,530,376
(1,433,376)
—
(55,384)
(7,658)
809
(1,410)
(141,279)
(1,050)
(152,166)
(20,623)
60,260
39,637 $
240,100
(599,144)
1,355,362
(1,332,462)
—
—
(4,753)
698
(1,682)
(84,324)
(578)
(426,783)
(20,595)
80,855
60,260 $
$
36,841
27,577
9,828
269,295
12,550
3,142
7,488
—
90
25,914
(266,997)
(5,346)
278
(6,983)
(23,041)
(21,689)
(35,816)
(9,930)
861
80,066
(57,546)
724
(56,822)
867,750
(505,442)
1,625,440
(1,865,069)
(53,635)
(66,290)
(7,876)
988
(2,216)
—
(976)
(7,326)
15,918
64,937
80,855
(continued on next page)
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Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities
Right-of-use assets obtained in exchange for new financing lease liabilities
Property and equipment purchases not yet paid
Supplemental cash flow data:
Cash interest paid
Cash income taxes paid (refunded), net
2022
Year Ended January 31,
2021
2020
$
$
$
$
$
34,847 $
1,160 $
9,059 $
18,252 $
21,525 $
72,741 $
1,653 $
7,890 $
41,059 $
(11,586) $
75,296
1,110
9,717
50,491
17,169
See notes to consolidated financial statements.
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CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business. Conn’s, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its
subsidiaries. References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN” refer to Conn’s, Inc. and, as apparent from the context, its
subsidiaries. Conn’s is a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition
to proprietary credit solutions for its core consumers. We operate an integrated and scalable business through our retail stores and website. Our
complementary product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global
brands across a wide range of price points. Our credit offering provides financing solutions to a large, under-served population of consumers who typically
have limited credit alternatives.
We operate two reportable segments: retail and credit. Our retail stores bear the “Conn’s HomePlus” name with all of our stores providing the same
products and services to a common customer group. Our stores follow the same procedures and methods in managing their operations. Our retail business
and credit business are operated independently from each other. The credit segment is dedicated to providing short- and medium-term financing to our
retail customers. The retail segment is not involved in credit approval decisions or collection efforts. Our management evaluates performance and allocates
resources based on the operating results of the retail and credit segments.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and prevailing
industry practices.
Fiscal Year. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
Variable Interest Entities. Variable Interest Entities (“VIEs”) are consolidated if the Company is the primary beneficiary. The primary beneficiary of a VIE
is the party that has (i) the power to direct the activities that most significantly impact the performance of the VIE and (ii) the obligation to absorb losses or
the right to receive benefits that could potentially be significant to the VIE.
We securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. We retain the servicing of the securitized
portfolio and have a variable interest in each corresponding VIE by holding the residual equity. We have determined that we are the primary beneficiary of
each respective VIE because (i) our servicing responsibilities for the securitized portfolio give us the power to direct the activities that most significantly
impact the performance of the VIE and (ii) our variable interest in the VIE gives us the obligation to absorb losses and the right to receive residual returns
that potentially could be significant. As a result, we consolidate the respective VIEs within our consolidated financial statements.
Refer to Note 6, Debt and Financing Lease Obligations, and Note 13, Variable Interest Entities, for additional information.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make informed judgments and estimates that
affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Changes in facts and
circumstances or additional information may result in revised estimates, and actual results may differ, even significantly, from these estimates. Management
evaluates its estimates and related assumptions regularly, including those related to the allowance for doubtful accounts and allowances for no-interest
option credit programs, which are particularly sensitive given the size of our customer portfolio balance.
Cash and Cash Equivalents. As of January 31, 2022 and 2021, cash and cash equivalents included cash and credit card deposits in transit. Credit card
deposits in transit included in cash and cash equivalents were $5.2 million and $7.9 million as of January 31, 2022 and 2021, respectively.
Restricted Cash. The restricted cash balance as of January 31, 2022 and 2021 includes $25.7 million and $41.6 million, respectively, of cash we collected
as servicer on the securitized receivables that was subsequently remitted to the VIEs and $4.2 million and $7.0 million, respectively, of cash held by the
VIEs as additional collateral for the asset-backed notes.
Customer Accounts Receivable. Customer accounts receivable reported in the Consolidated Balance Sheet includes total receivables managed, including
both those transferred to the VIEs and those not transferred to the VIEs. Customer accounts receivable are recognized at the time the customer takes
possession of the product. Expected lifetime losses on customer accounts receivable are recognized upon origination through an allowance for credit losses
account that is deducted from the customer account receivable balance and presented net thereof. Customer accounts receivable include the net of
unamortized deferred fees charged to customers and origination costs. Customer receivables are considered delinquent if a payment has not been received
on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are
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CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
charged-off against the allowance for doubtful accounts along with interest accrued subsequent to the last payment.
In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. The loan
modifications are intended to maximize net cash flow after expenses and avoid the need to exercise legal remedies available to us. We may extend or “re-
age” a portion of our customer accounts, which involves modifying the payment terms to defer a portion of the cash payments due. Our re-aging of
customer accounts does not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly
contractual payments. To a much lesser extent, we may provide the customer the ability to refinance their account, which typically does not change the
interest rate or the total principal amount due from the customer but does reduce the monthly contractual payments and extend the term. We consider
accounts that have been re-aged in excess of three months or refinanced as Troubled Debt Restructurings (“TDR” or “Restructured Accounts”).
On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law to address the economic impact of the
COVID-19 pandemic. Under the CARES Act, modifications deemed to be COVID-19 related are not considered a TDR if the loan was current (not more
than 30 days past due as of March 31, 2020) and the deferral was executed between April 1, 2020 and the earlier of 60 days after the termination of the
COVID-19 national emergency or December 31, 2020. In response to the CARES Act, the Company implemented short-term deferral programs for our
customers. The carrying value of the customer receivables on accounts which were current prior to receiving a COVID-19 related deferment was
$18.9 million and $65.2 million as of January 31, 2022 and 2021.
Interest Income on Customer Accounts Receivable. Interest income, which includes interest income and amortization of deferred fees and origination
costs, is recorded using the interest method and is reflected in finance charges and other revenues. Typically, interest income is recorded until the customer
account is paid off or charged-off, and we provide an allowance for estimated uncollectible interest. We reserve for interest that is more than 60 days past
due. Any contractual interest income received from customers in excess of the interest income calculated using the interest method is recorded as deferred
revenue on our balance sheets. At January 31, 2022 and 2021, there were $8.6 million and $8.9 million, respectively, of deferred interest included in
deferred revenues and other credits and other long-term liabilities. The deferred interest will ultimately be brought into income as the accounts pay off or
charge-off.
We offer a 12-month no-interest option program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in
full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of
the interest earned is waived. Interest income is recognized based on estimated accrued interest earned to date on all no-interest option finance programs
with an offsetting reserve for those customers expected to satisfy the requirements of the program based on our historical experience.
We recognize 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
equals the present value of expected future cash flows.
We place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the balance
of the loan. At January 31, 2022 and 2021, the carrying value of customer accounts receivable in non-accrual status was $5.9 million and $8.5 million,
respectively. At January 31, 2022 and 2021, the carrying value of customer accounts receivable that were past due 90 days or more and still accruing
interest totaled $84.1 million and $111.5 million, respectively. At January 31, 2022 and January 31, 2021, the carrying value of customer accounts
receivable in a bankruptcy status that were less than 60 days past due of $5.5 million and $5.2 million, respectively, were included within the customer
receivables balance carried in non-accrual status.
Allowance on Doubtful Accounts. The allowance for credit losses is measured on a collective (pool) basis where similar risk characteristics exist. Upon
adoption of ASC 326, the Company elected to maintain the pools of customer accounts receivable that were previously accounted for under ASC 310
(Non-TDR Non-Re-aged, Non-TDR Re-aged, and TDR). These pools are further segmented based on shared risk attributes, which include the borrower’s
FICO score, product class, length of customer relationship and delinquency status. The allowance for credit losses is determined for each pool and added to
the pool’s carrying amount to establish a new amortized cost basis. Changes to the allowance for credit losses after adoption are recorded through provision
expense.
We have elected to use a risk-based, pool-level segmentation framework to calculate the expected loss rate. This framework is based on our historical gross
charge-off history. In addition to adjusted historical gross charge-off rates, estimates of post-charge-off recoveries, including cash payments from
customers, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance and repair service agreement (“RSA”) policies are
also considered. We also consider forward-looking economic forecasts based on a statistical analysis of economic factors (specifically, forecast of
unemployment rates
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over the reasonable and supportable forecasting period). To the extent that situations and trends arise which are not captured in our model, management
will layer on additional qualitative adjustments.
The Company uses a 24-month reasonable and supportable forecast period for the Customer Accounts Receivable portfolio. We estimate losses beyond the
24-month forecast period based on historic loss rates experienced over the life of our historic loan portfolio by loan pool type. We revisit our measurement
methodology and assumption annually, or more frequently if circumstances warrant.
Inventories. Inventories consist of merchandise purchased for resale and service parts and are recorded at the lower of cost or net realizable value. The
carrying value of the inventory is reduced to its net realizable value for any product lines with excess of carrying amount, typically weighted-average cost,
over the amount we expect to realize from the ultimate sale or other disposition of the inventory, with a corresponding charge to cost of sales. The write-
down of inventory to net realizable value is estimated based on assumptions regarding inventory aging and historical product sales.
Vendor Allowances. We receive funds from vendors for price protection, product rebates (earned upon purchase or sale of product), marketing, and
promotion programs, collectively referred to as vendor allowances, which are recorded on an accrual basis. We estimate the vendor allowances to accrue
based on the progress of satisfying the terms of the programs based on actual and projected sales or purchase of qualifying products. If the programs are
related to product purchases, the vendor allowances are recorded as a reduction of product cost in inventory still on hand with any remaining amounts
recorded as a reduction of cost of goods sold. During the years ended January 31, 2022, 2021 and 2020, we recorded $118.1 million, $122.7 million and
$156.6 million, respectively, as reductions in cost of goods sold from vendor allowances.
Property and Equipment. Property and equipment, including any major additions and improvements to property and equipment, are recorded at cost.
Normal repairs and maintenance that do not materially extend the life of property and equipment are expensed as incurred. Depreciation, which includes
amortization of financed leases, is computed using the straight-line method over the estimated useful lives of the assets, or in the case of leasehold
improvements, over the shorter of the estimated useful lives or the remaining terms of the leases.
Internal-Use Software Costs. Costs related to software developed or obtained for internal use and cloud-based computing arrangements are expensed as
incurred until the application development stage has been reached. Once the application development stage has been reached, certain qualifying costs are
capitalized until the software is ready for its intended use. Costs incurred during the post implementation stage are expensed as incurred. Once placed into
service, capitalized costs are amortized over periods of up to 10 years. No software costs were written-off in the years ended January 31, 2022 and 2021.
For the year ended January 31, 2020, we incurred a $1.2 million loss on impairments of software costs for a loan management system that was abandoned
during fiscal year 2020. See Note 4, Charges and Credits, for further details regarding fiscal year 2020 write-offs.
Impairment of Long-Lived Assets. Long-lived assets are evaluated for impairment, primarily at the asset group level. The asset group is defined as stores
and cross-docks within a distribution center’s service area. We monitor asset group performance in order to assess if events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The most likely condition that would necessitate an assessment would be an adverse
change in historical and estimated future results of an asset group's performance. For property and equipment held and used, we recognize an impairment
loss if the carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the
carrying amount and estimated fair value. During the year ended January 31, 2020, we recognized $3.2 million in impairments from the exiting of certain
leases. See Note 4, Charges and Credits, for details. For the years ended January 31, 2022 and 2021 there were no impairments.
Leases. We determine if an arrangement is a lease at inception. Operating lease right-of-use assets and liabilities are recognized at the commencement date
based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental
borrowing rate based on the information available at the commencement date in determining the present value of lease payments. If the estimate of our
incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.
We record lease incentives as a reduction to the operating lease right-of-use assets upon commencement of the lease and amortize the balance on a straight-
line basis over the life of the lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease terms may include options
to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense is recognized on a straight-line basis over the
lease term.
We have made a policy election for all classifications of leases to combine lease and non-lease components and to account for them as a single lease
component.
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Debt Issuance Costs. Costs that are direct and incremental to debt issuance are deferred and amortized to interest expense using the effective interest
method over the expected life of the debt. All other costs related to debt issuance are expensed as incurred. We present debt issuance costs associated with
long-term debt as a reduction of the carrying amount of the debt. Unamortized costs related to the Revolving Credit Facility, as defined in Note 6, Debt and
Financing Lease Obligations, are included in other assets on our Consolidated Balance Sheet and were $5.1 million and $3.5 million as of January 31,
2022 and 2021, respectively.
Revenue Recognition. The Company accounts for revenue under ASC 606 and has the following material revenue streams: the sale of products (e.g.
appliances, electronics) including delivery; the sale of third party warranty and insurance programs, including retrospective income; service income;
interest income generated from the financing of point of sale transactions; and volume rebate incentives received from a third party financier.
Sale of Products Including Delivery: The Company has a single performance obligation associated with these contracts: the delivery of the product to the
customer, at which point control transfers. Revenue for the sale of products is recognized at the time of delivery, net of any adjustments for sales incentives
such as discounts, coupons, rebates or other free products or services. Sales financed through third-party no-interest option programs typically require us to
pay a fee to the third party on each completed sale, which is recorded as a reduction of net sales in the retail segment.
Sale of Third Party Warranty and Insurance Programs, Including Retrospective Income: We sell repair service agreements (“RSA”) and credit insurance
contracts on behalf of unrelated third-parties. The Company has a single performance obligation associated with these contracts: the delivery of the product
to the customer, at which point control transfers. Commissions related to these contracts are recognized in revenue upon delivery of the product. We also
may serve as the administrator of the RSAs sold and defer 5% of the revenue received from the sale of RSAs as compensation for this performance
obligation as 5% represents the estimated stand-alone sales price to serve as the administrator. The deferred RSA administration fee is recorded in income
ratably over the life of the RSA contract sold. Retrospective income on RSA contracts is recognized upon delivery of the product based on an estimate of
claims and is adjusted throughout the life of the contracts as actual claims materialize. Retrospective income on insurance contracts is recognized when
earned as that is the point at which we no longer believe a significant reversal of income is probable as the consideration is highly susceptible to factors
outside of our influence.
Service Income: The Company has a single performance obligation associated with these contracts: the servicing of the RSA claims. Service revenues are
recognized at the time service is provided to the consumer.
Volume Rebate Incentive: As part of our agreement with our third-party provider of no-interest option programs, we may receive a volume rebate incentive
based on the total dollar value of sales made under our third-party provider program. The Company has a single performance obligation associated with this
contract: the delivery of the product to the customer, at which point control transfers. Revenue for the volume rebate incentive is recognized upon delivery
of the product to the customer based on the projected total annual dollar value of sales to be made under our third-party provider.
Deferred Revenue. Deferred revenue related to contracts with customers consists of deferred customer deposits and deferred RSA administration fees.
During the twelve months ended January 31, 2022, we recognized $4.7 million of revenue for customer deposits deferred as of the beginning of the period
compared to $1.2 million recognized during the twelve months ended January 31, 2021. During the twelve months ended January 31, 2022, we
recognized $3.2 million of revenue for RSA administrative fees deferred as of the beginning of the period compared to $4.0 million recognized during the
twelve months ended January 31, 2021.
Expense Classifications. We record as cost of goods sold, the direct cost of products and parts sold and related costs for delivery, transportation and
handling, inbound freight, receiving, inspection, and other costs associated with the operations of our distribution system, including occupancy related to
our warehousing operations. The costs associated with our merchandising, advertising, sales commissions, and all store occupancy costs, are included in
selling, general and administrative expense (“SG&A”).
Advertising Costs. Advertising costs are expensed as incurred. For fiscal years 2022, 2021 and 2020, advertising expense was $90.4 million, $72.5 million
and $84.8 million, respectively.
Stock-based Compensation. Stock-based compensation expense is recorded for share-based compensation awards, net of actual forfeitures, over the
requisite service period using the straight-line method. For equity-classified share-based compensation awards, expense is recognized based on the grant-
date fair value. For stock option grants, we use the Black-Scholes model to determine fair value. For grants of restricted stock units, the fair value of the
grant is the market value of our stock at the date of issuance. For grants of performance-based restricted stock units, the fair value of the grant is the market
value of our stock at the date of issuance adjusted for any market conditions.
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Self-insurance. We are self-insured for certain losses relating to group health, workers’ compensation, automobile, general and product liability claims. We
have stop-loss coverage to limit the exposure arising from these claims. Self-insurance losses for claims filed and claims incurred, but not reported, are
accrued based upon our estimates of the net aggregate liability for claims incurred using development factors based on historical experience.
Income Taxes. We are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. We follow the liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between GAAP and tax bases of
assets and liabilities and for operating loss and tax credit carryforwards, as measured using the enacted tax rates expected to be in effect when the
temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period in which the enactment occurs. A valuation allowance is provided when it is more-likely-than-not that some portion or all of a deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become realizable. To the extent penalties and interest are incurred, we record these charges as a component of our
provision for income taxes.
We review and update our tax positions as necessary to add any new uncertain tax positions taken, or to remove previously identified uncertain positions
that have been adequately resolved. Additionally, uncertain positions may be remeasured as warranted by changes in facts or law. Accounting for uncertain
tax positions requires estimating the amount, timing and likelihood of ultimate settlement.
Earnings per Share. Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share includes the dilutive effects of any stock options, restricted stock unit awards (“RSUs”) and performance stock
awards (“PSUs”), which are calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share
calculations:
Weighted-average common shares outstanding - Basic
Dilutive effect of stock options, RSUs and PSUs
Weighted-average common shares outstanding - Diluted
2022
29,267,691
733,799
30,001,490
Year Ended January 31,
2021
29,060,512
—
29,060,512
2020
30,275,662
539,113
30,814,775
For the years ended January 31, 2022, 2021 and 2020, the weighted-average number of stock options, RSUs, and PSUs not included in the calculation due
to their anti-dilutive effect, was 704,582, 1,097,996 and 898,449, respectively.
Contingencies. An estimated loss from a contingency is recorded if it is probable that an asset has been impaired or a liability has been incurred at the date
of the financial statements and the amount of the loss can be reasonably estimated. Gain contingencies are not recorded until realization is assured beyond a
reasonable doubt. Legal costs related to loss contingencies are expensed as incurred.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical
levels related to subjectivity associated with the inputs to fair value measurements as follows:
•
•
•
Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for
example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets
not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
Level 3 – Inputs that are not observable from objective sources such as our internally developed assumptions used in pricing an asset or liability
(for example, an estimate of future cash flows used in our internally developed present value of future cash flows model that underlies the fair-
value measurement).
In determining fair value, we use observable market data when available, or models that incorporate observable market data. When we are required to
measure fair value and there is not a market-observable price for the asset or liability or for a similar asset or liability, we use the cost or income approach
depending on the quality of information available to support management’s assumptions. The cost approach is based on management’s best estimate of the
current asset replacement cost. The income approach is based on management’s best assumptions regarding expectations of future net cash flows and
discounts the expected cash flows using a commensurate risk-adjusted discount rate. Such evaluations involve significant judgment, and
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the results are based on expected future events or conditions such as sales prices, economic and regulatory climates, and other factors, most of which are
often outside of management’s control. However, we believe assumptions used reflect a market participant’s view of long-term prices, costs, and other
factors and are consistent with assumptions used in our business plans and investment decisions.
In arriving at fair-value estimates, we use relevant observable inputs available for the valuation technique employed. If a fair-value measurement reflects
inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based on the lowest level of input that is significant to the fair-
value measurement.
The fair value of cash and cash equivalents, restricted cash and accounts payable approximate their carrying amounts because of the short nature of these
instruments. The fair value of customer accounts receivable, determined using a Level 3 discounted cash flow analysis, approximates their carrying value,
net of the allowance for doubtful accounts. The fair value of our Revolving Credit Facility approximates carrying value based on the current borrowing rate
for similar types of borrowing arrangements. At January 31, 2022, the fair value of the asset-backed notes was $369.6 million, compared to the carrying
value of $370.8 million, which was determined using Level 2 inputs based on inactive trading activity.
Recent Accounting Pronouncements Adopted.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASC 326”). ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit
loss (CECL) methodology. Under the new guidance entities must reserve an allowance for expected credit losses over the life of the loan. The measurement
of expected credit losses is applicable to financial assets measured at amortized cost. The allowance for credit losses is a valuation account that is deducted
from the customer account receivable’s amortized cost basis to present the net amount expected to be collected. Customer receivables are charged off
against the allowance when management deems an account to be uncollectible. In April 2019, the FASB issued ASU 2019-04, Codification Improvements
to Topic 326, Financial Instruments - Credit Losses. ASU 2019-04 requires that the current estimate of recoveries are included in the allowance for credit
losses.
Effective February 1, 2020, the Company adopted ASU 2016-13 and ASU 2019-04 using the modified retrospective approach. The Company has reviewed
its entire portfolio of assets recognized on the balance sheet as of January 31, 2020 and identified Customer Accounts Receivables as the materially
impacted asset in-scope of ASC 326. The risk of credit losses from the remaining portfolio of assets was concluded to be immaterial. Upon adoption of
ASC 326 the Company recorded a net decrease to retained earnings of $76.5 million as of February 1, 2020. Results for reporting periods prior to February
1, 2020 are not adjusted and continue to be reported in accordance with the Company’s historic accounting policies under previously applicable GAAP.
The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as a result of the adoption of ASC 326 were as follows:
(in thousands)
Assets
Customer accounts receivable
Long-term portion of customer accounts receivable
Deferred Income Taxes
Stockholders’ Equity
Retained Earnings
Impact of Adoption of ASC 326
Balance at January 31,
2020
Adjustments due to ASC 326
Balance at February 1,
2020
$
$
673,742 $
663,761
18,599
570,636 $
(49,700) $
(48,962)
22,173
(76,489) $
624,042
614,799
40,772
494,147
Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the
general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This accounting standards update
became effective for us in the first quarter of fiscal year 2022. The adoption did not have a material impact on our consolidated financial statements.
Changes due to Securities and Exchange Commission Modernization Regulation S-K Items 101, 103, and 105
On August 26, 2020, the Securities and Exchange Commission ("SEC") adopted amendments to modernize the description of business, legal proceedings
and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These
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amendments are intended to eliminate duplicative disclosures and modernize and enhance Management's Discussion & Analysis of Financial Condition
and Results of Operations disclosures. Previously, more explicit disclosures were required whereas now management is able to take a principles-based
approach in disclosing certain material information. The amendments became effective February 10, 2021.
Recent Accounting Pronouncements Yet To Be Adopted.
Reference Rate Reform on Financial Reporting. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial Reporting, an update that provides optional expedients and exceptions for applying GAAP to contracts,
hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01,
Reference Rate Reform (Topic 848), Scope, to clarify the scope of the guidance and reduce potential diversity in practice. The amendments in this update
apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of
reference rate reform. These accounting standard updates were effective upon issuance, with adoption permitted through December 31, 2022. We expect to
adopt ASC 2020-04 and ASC 2021-01 upon transition from LIBOR, prior to December 31, 2022. We do not expect the adoption to have a material impact
on our consolidated financial statements.
No other new accounting pronouncements issued or effective as of January 31, 2022 have had or are expected to have a material impact on our
consolidated financial statements.
2. Customer Accounts Receivable
Customer accounts receivable consisted of the following:
(1)
(in thousands)
Customer accounts receivable
Deferred fees and origination costs, net
Allowance for no-interest option credit programs
Allowance for uncollectible interest
Carrying value of customer accounts receivable
Allowance for credit losses
Carrying value of customer accounts receivable, net of allowance for bad debts
(2)
Short-term portion of customer accounts receivable, net
Long-term customer accounts receivable, net
(in thousands)
Customer accounts receivable 60+ days past due
Re-aged customer accounts receivable
Restructured customer accounts receivable
(4)
(5)
(3)
$
$
$
January 31,
2022
January 31,
2021
1,130,395 $
(13,503)
(19,654)
(15,124)
1,082,114
(193,896)
888,218
(455,787)
432,431 $
1,233,717
(14,212)
(11,985)
(21,427)
1,186,093
(276,610)
909,483
(478,734)
430,749
Carrying Value
January 31,
2022
January 31,
2021
112,858 $
181,996
99,557
146,820
306,845
178,374
(1) As of January 31, 2022 and 2021, the customer accounts receivable balance included $22.3 million and $31.1 million, respectively, in interest
receivable. Net of the allowance for uncollectible interest, interest receivable outstanding as of January 31, 2022 and 2021 was $7.2 million and
$9.7 million, respectively.
(2) Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as of January 31, 2022 and 2021, which incorporated the
continued estimated impact of the global COVID-19 pandemic on the U.S. economy. Our forecast utilized economic projections from a major rating
service reflecting a decrease in unemployment rates.
(3) As of January 31, 2022 and 2021, the carrying value of customer accounts receivable past due one day or greater was $299.0 million and $340.8
million, respectively. These amounts include the 60+ days past due balances shown above.
(4) The re-aged carrying value as of January 31, 2022 and 2021 includes $48.6 million and $88.0 million, respectively, in carrying value that are both 60+
days past due and re-aged.
(5) The restructured carrying value as of January 31, 2022 and 2021 includes $29.0 million and $57.1 million, respectively, in carrying value that are both
60+ days past due and restructured.
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The allowance for credit losses included in the current and long-term portion of customer accounts receivable, net as shown in the Condensed Consolidated
Balance Sheet were as follows:
(in thousands)
Customer accounts receivable - current
Allowance for credit losses for customer accounts receivable - current
Customer accounts receivable, net of allowances
Customer accounts receivable - non current
Allowance for credit losses for customer accounts receivable - non current
Long-term portion of customer accounts receivable, net of allowances
Total customer accounts receivable, net
January 31, 2022
January 31, 2021
564,825 $
(109,038)
455,787
532,413
(99,982)
432,431
888,218 $
643,903
(165,169)
478,734
563,617
(132,868)
430,749
909,483
$
$
The following presents the activity in our allowance for credit losses and uncollectible interest for customer accounts receivable:
(1)
(in thousands)
Allowance at beginning of period
Provision
Principal charge-offs
Interest charge-offs
Recoveries
(2)
(2)
Allowance at end of period
Average total customer portfolio balance
(in thousands)
Allowance at beginning of period
Impact of adoption ASC 326
Provision
Principal charge-offs
Interest charge-offs
Recoveries
(2)
(1)
(2)
Allowance at end of period
Average total customer portfolio balance
69
January 31, 2022
Customer
Accounts
Receivable
Restructured
Accounts
Total
219,739 $
52,872
(105,889)
(28,972)
27,294
165,044 $
995,373 $
78,298 $
30,936
(64,239)
(17,576)
16,557
43,976 $
140,618 $
298,037
83,808
(170,128)
(46,548)
43,851
209,020
1,135,991
January 31, 2021
Customer
Accounts
Receivable
Restructured
Accounts
Total
145,680 $
95,136
185,210
(178,777)
(50,060)
22,550
219,739 $
1,184,174 $
88,124 $
3,526
80,276
(81,142)
(22,721)
10,235
78,298 $
211,254 $
233,804
98,662
265,486
(259,919)
(72,781)
32,785
298,037
1,395,428
$
$
$
$
$
$
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CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3)
(in thousands)
Allowance at beginning of period
Provision
Principal charge-offs
Interest charge-offs
Recoveries
(2)
(2)
Allowance at end of period
Average total customer portfolio balance
January 31, 2020
Customer
Accounts
Receivable
Restructured
Accounts
Total
$
$
$
147,123 $
177,250
(158,773)
(37,850)
17,930
145,680 $
1,367,260 $
67,756 $
91,356
(63,074)
(15,037)
7,123
88,124 $
200,618 $
214,879
268,606
(221,847)
(52,887)
25,053
233,804
1,567,878
(1) Includes provision for uncollectible interest, which is included in finance charges and other revenues, and changes in expected future recoveries.
(2) Charge-offs include the principal amount of losses (excluding accrued and unpaid interest). Recoveries include the principal amount collected during
the period for previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.
(3) Includes provision for uncollectible interest, which is included in finance charges and other revenues.
We manage our Customer Accounts Receivable portfolio using delinquency as a key credit quality indicator. The following table presents the delinquency
distribution of the carrying value of customer accounts receivable by calendar year of origination as of January 31, 2022:
(dollars in thousands)
Delinquency Bucket
Current
1-30
31-60
61-90
91+
Total
2022
$49,086
—
—
—
—
$49,086
2021
$499,028
78,304
19,498
14,261
35,830
$646,921
2020
$163,576
39,683
10,509
7,562
24,678
$246,008
2019
$63,716
23,019
7,367
5,243
18,038
$117,383
Prior
$7,693
5,630
2,147
1,544
5,702
$22,716
Total
$783,099
146,636
39,521
28,610
84,248
$1,082,114
% of Total
72.3%
13.6%
3.7%
2.6%
7.8%
100.0%
3. Property and Equipment
Property and equipment consist of the following:
(dollars in thousands)
Land
Buildings
Leasehold improvements
Equipment and fixtures
Finance leases
Construction in progress
Less accumulated depreciation
Estimated
Useful Lives
—
30 years
5 to 15 years
3 to 5 years
3 to 20 years
—
January 31,
2022
2021
$
$
1,644 $
4,121
331,776
104,623
9,480
31,764
483,408
(290,645)
192,763 $
1,644
4,115
313,926
97,407
9,027
14,702
440,821
(249,859)
190,962
Depreciation expense was approximately $45.5 million, $41.1 million and $36.8 million for the years ended January 31, 2022, 2021 and 2020, respectively.
Construction in progress is comprised primarily of the construction of leasehold improvements
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related to unopened retail stores and internal-use software under development. Finance lease assets primarily include retail locations.
4. Charges and Credits
Charges and credits consisted of the following:
(in thousands)
Store and facility closure and relocation costs
Legal and professional fees, securities-related litigation, a legal judgment and other legal matters
Employee severance
Excess import freight costs
Write-off of capitalized software costs
Year Ended January 31,
2021
2022
2020
$
$
— $
—
—
2,677
—
2,677 $
— $
3,589
2,737
—
—
6,326 $
1,933
—
—
—
1,209
3,142
During the year ended January 31, 2022, we recognized $2.7 million of non-recurring domestic transportation costs incurred due to unprecedented
congestion in U.S. ports. During the year ended January 31, 2021, we recognized $3.6 million in professional fees associated with non-recurring expenses.
In addition, we recognized $2.7 million in severance costs related to a change in the executive management team. During the year ended January 31, 2020,
we recognized $3.2 million in impairments from the exiting of certain leases upon the relocation of three distribution centers into one facility. These facility
closure costs were offset by a $0.7 million gain from increased sublease income related to the consolidation of our corporate headquarters and a
$0.6 million gain from the sale of a cross-dock. In addition, we recognized $1.2 million in impairments of software costs for a loan management system
that was abandoned during the third quarter of fiscal year 2020.
5. Finance Charges and Other Revenues
Finance charges and other revenues consisted of the following:
(in thousands)
Interest income and fees
Insurance income
Other revenues
Total finance charges and other revenues
Year Ended January 31,
2021
2022
2020
$
$
259,422 $
24,270
950
284,642 $
303,209 $
17,689
816
321,714 $
341,224
38,417
810
380,451
Interest income and fees and insurance income are derived from the credit segment operations, whereas other revenues are derived from the retail segment
operations. Insurance income is comprised of sales commissions from third-party insurance companies that are recognized when coverage is sold and
retrospective income paid by the insurance carrier if insurance claims are less than earned premiums.
For the years ended January 31, 2022, 2021 and 2020, interest income and fees reflected provisions for uncollectible interest of $36.1 million, $63.9 million
and $64.1 million, respectively. The amount included in interest income and fees related to TDR accounts for the years ended January 31, 2022, 2021 and
2020 is $24.9 million, $37.5 million and $35.3 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Debt and Financing Lease Obligations
Debt and financing lease obligations consisted of the following:
(in thousands)
Revolving Credit Facility
Senior Notes
2019-A VIE Asset-backed Class A Notes
2019-A VIE Asset-backed Class B Notes
2019-A VIE Asset-backed Class C Notes
2019-B VIE Asset-backed Class A Notes
2019-B VIE Asset-backed Class B Notes
2019-B VIE Asset-backed Class C Notes
2020-A VIE Asset-backed Class A Notes
2020-A VIE Asset-backed Class B Notes
2020-A VIE Asset-backed Class C Notes
2021-A VIE Asset-backed Class A Notes
2021-A VIE Asset-backed Class B Notes
2021-A VIE Asset-backed Class C Notes
Financing lease obligations
Total debt and financing lease obligations
Less:
Discount on debt
Deferred debt issuance costs
Current finance lease obligations
Long-term debt and financing lease obligations
Future maturities of debt, excluding financing lease obligations, as of January 31, 2022 are as follows:
(in thousands)
Year Ended January 31,
2023
2024
2025
2026
2027
Total
$
$
January 31,
2022
2021
149,000 $
—
—
—
—
—
—
—
9,184
18,342
17,695
195,595
66,090
63,890
6,115
525,911
—
(2,873)
(889)
522,149 $
$
$
52,000
141,172
19,521
25,069
24,202
17,860
85,540
83,270
93,326
65,200
—
—
—
—
6,072
613,232
(524)
(3,139)
(934)
608,635
—
—
—
194,221
325,575
519,796
Senior Notes. On July 1, 2014, we issued $250.0 million of unsecured Senior Notes due July 2022 bearing interest at 7.25%, (the “Senior Notes”) pursuant
to an indenture dated July 1, 2014 (as amended, the “Indenture”), among Conn’s, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National
Association, as trustee. On April 15, 2021 we completed the redemption of all of our outstanding Senior Notes in an aggregate principal amount of
$141.2 million.
Asset-backed Notes. From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In
turn, the VIEs issue asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.
Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the
holders of issued notes, and then to us as the holder of non-issued notes, if any, and residual equity. We retain the servicing of the securitized portfolios and
receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all
credit insurance income together with
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which are reflected as a reduction
to net charge-offs on a consolidated basis.
The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under
the Securities Act. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding
amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would
instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely
to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no
recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or
specified bankruptcy-related events.
The asset-backed notes outstanding as of January 31, 2022 consisted of the following:
(dollars in thousands)
Asset-Backed Notes
2020-A Class A Notes
2020-A Class B Notes
2020-A Class C Notes
2021-A Class A Notes
2021-A Class B Notes
2021-A Class C Notes
Total
Original
Principal
Amount
Original Net
(1)
Proceeds
Current
Principal
Amount
$
$
174,900 $
65,200
62,900
247,830
66,090
63,890
680,810 $
173,716 $
64,754
62,535
246,152
65,635
63,450
676,242 $
9,184
18,342
17,695
195,595
66,090
63,890
370,796
(1) After giving effect to debt issuance costs.
Issuance Date
10/16/2020
10/16/2020
2/24/2021
11/23/2021
11/23/2021
11/23/2021
Maturity
Date
6/16/2025
6/16/2025
6/16/2025
5/15/2026
5/15/2026
5/15/2026
Contractual
Interest Rate
1.71%
4.27%
4.20%
1.05%
2.87%
4.59%
Effective
Interest Rate
(2)
4.47%
5.51%
5.72%
2.43%
3.36%
5.07%
(2) For the year ended January 31, 2022, and inclusive of the impact of changes in timing of actual and expected cash flows.
On February 24, 2021, the Company completed the sale of $62.9 million aggregate principal amount of 4.20% Asset Backed Notes, Class C, Series 2020-
A, which were previously issued and held by the Company. The asset-backed notes are secured by the transferred customer accounts receivables and
restricted cash held by a consolidated VIE, which resulted in net proceeds to us of $62.5 million, net of debt issuance costs. Net proceeds from the sale
were used to repay amounts outstanding under the Company’s Revolving Credit Facility.
On May 12, 2021, the Company completed the redemption of the 2019-A Asset Backed Notes at an aggregate redemption price of $41.1 million (which
was equal to the entire outstanding principal balance plus accrued interest).
On November 23, 2021, the Company completed the issuance and sale of $377.8 million aggregate principal amount of asset-backed notes secured by the
transferred customer accounts receivables and restricted cash held by a consolidated VIE, which resulted in net proceeds to us of $375.2 million, net of debt
issuance costs. Net proceeds from the offering were used to repay indebtedness under the Company’s Revolving Credit Facility, as defined below, and for
other general corporate purposes. The asset-backed notes mature on May 15, 2026 and consist of $247.8 million of 1.05% Asset Backed Fixed Rate Notes,
Class A, Series 2021-A, $66.1 million of 2.87% Asset Backed Fixed Rate Notes, Class B, Series 2021-A, and $63.9 million of 4.59% Asset Backed Fixed
Rate Notes, Class C, Series 2021-A Asset Backed Fixed Rate Notes.
On December 30, 2021 the Company completed the redemption of the 2019-B Asset Backed Notes at an aggregate redemption price of $52.4 million
(which was equal to the entire outstanding principal balance plus accrued interest).
Revolving Credit Facility. On March 29, 2021, Conn’s, Inc. and certain of its subsidiaries (the “Borrowers”) entered into the Fifth Amended and Restated
Loan and Security Agreement (the “Fifth Amended and Restated Loan Agreement”), with certain lenders, which provides for a $650.0 million asset-based
revolving credit facility (as amended, the “Revolving Credit Facility”) under which credit availability is subject to a borrowing base and a maturity date of
March 29, 2025.
The Fifth Amended and Restated Loan Agreement, among other things, permits borrowings under the Letter of Credit Subline (as defined in the Fifth
Amended and Restated Loan Agreement) that exceed the cap of $40 million to $100 million, solely at the discretion of the lenders for such amounts in
excess of $40 million. The obligations under the Revolving Credit Facility are secured by substantially all assets of the Company, excluding the assets of
the VIEs. As of January 31, 2022, we had immediately available borrowing capacity of $352.2 million under our Revolving Credit Facility, net of standby
letters of credit issued of $22.5 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 2.50% to 3.25% per annum
(depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum
(depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the
federal funds effective rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. We also pay an unused fee on the portion of the commitments that
is available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.50% per annum, depending on the average outstanding balance and
letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and
including unused line fees under the Revolving Credit Facility was 4.0% for the year ended January 31, 2022.
The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests,
dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make
dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make
distributions to the Company and other obligors under the Revolving Credit Facility without restriction. As of January 31, 2022, we were restricted from
making distributions in excess of $225.9 million as a result of the Revolving Credit Facility distribution and payment restrictions. The Revolving Credit
Facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit
Facility.
Debt Covenants. We were in compliance with our debt covenants at January 31, 2022. A summary of the significant financial covenants that govern our
Revolving Credit Facility compared to our actual compliance status at January 31, 2022 is presented below:
Interest Coverage Ratio for the quarter must equal or exceed minimum
Interest Coverage Ratio for the trailing two quarters must equal or exceed minimum
Leverage Ratio must not exceed maximum
ABS Excluded Leverage Ratio must not exceed maximum
Capital Expenditures, net, must not exceed maximum
Actual
8.35:1.00
9.29:1.00
1.38:1.00
0.83:1.00
$30.7 million
Required
Minimum/
Maximum
1.00:1.00
1.50:1.00
4.50:1.00
2.50:1.00
$100.0 million
All capitalized terms in the above table are defined by the Revolving Credit Facility and may or may not agree directly to the financial statement captions
in this document. The covenants are calculated quarterly, except for capital expenditures, which is calculated for a period of four consecutive fiscal
quarters, as of the end of each fiscal quarter.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
Deferred tax assets and liabilities consisted of the following:
(in thousands)
Deferred tax assets:
Deferred revenue
Employment tax
Indirect tax reserve
Inventories
Lease liability
Stock-based compensation
Net operating loss carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Allowance for doubtful accounts
Right-of-use asset
Vendor prepayments
Sales tax receivable
Property and equipment
Other
Total deferred tax liabilities
Net deferred tax (liability) asset
January 31,
2022
2021
549 $
831
3,063
2,656
72,252
3,235
1,489
2,364
86,439
(9,808)
(57,583)
(1,320)
(4,664)
(20,401)
(14)
(93,790)
(7,351) $
788
1,661
2,927
1,866
89,411
2,121
25,131
2,192
126,097
(9,829)
(59,725)
(1,165)
(5,085)
(40,454)
(391)
(116,649)
9,448
$
$
As of January 31, 2022, the Company had a tax-effected state net operating loss carryforward of $1.5 million. Our state net operating loss carryforwards
begin to expire starting with fiscal year 2030.
Realization of our deferred tax asset ultimately depends on the existence of sufficient taxable income, which may include future taxable income and tax
planning strategies. Based on the weight of available evidence at January 31, 2022, we believe that it is more likely than not that we will generate sufficient
taxable income to utilize our entire deferred tax asset prior to its expiration.
Provision (benefit) for income taxes consisted of the following:
(in thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Provision (benefit) for income taxes
2022
Year Ended January 31,
2021
2020
$
$
13,428 $
3,285
16,713
14,726
2,073
16,799
33,512 $
(47,829) $
316
(47,513)
31,083
240
31,323
(16,190) $
9,215
1,611
10,826
7,590
(102)
7,488
18,314
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision (benefit) for income taxes at the U.S. federal statutory tax rate and the total tax provision for each of the periods presented
in the statements of operations follows:
(in thousands)
Income tax provision (benefit) at U.S. federal statutory rate
State income taxes, net of federal benefit
Tax Act and other deferred tax adjustments
Employee benefits
Other
Provision (benefit) for income taxes
2022
Year Ended January 31,
2021
2020
$
$
29,761 $
3,782
—
419
(450)
33,512 $
(4,059) $
843
(15,009)
1,350
685
(16,190) $
15,607
2,011
(910)
1,873
(267)
18,314
A benefit of $14.9 million was recognized as of January 31, 2021 as a result of net operating loss provisions within the CARES Act (the “Tax Act”) that
provide for a five-year carryback of losses.
Federal tax returns for fiscal years subsequent to January 31, 2018, remain subject to examination. Generally, state tax returns for fiscal years subsequent to
January 31, 2018 remain subject to examination.
Changes in the balance of unrecognized tax benefits, including interest and penalties on uncertain tax positions, were as follows:
(in thousands)
Balance at February 1
Decreases related to prior year tax positions
Increase related to current year tax positions
Balance at January 31
2022
Year Ended January 31,
2021
2020
$
$
(9,853) $
982
(452)
(9,323) $
(11,384) $
1,531
—
(9,853) $
(11,625)
241
—
(11,384)
As of January 31, 2022, 2021 and 2020 there are $4.6 million, $5.3 million, and $3.5 million, respectively of unrecognized tax benefits that, if recognized,
would favorably affect the Company’s annual effective tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. During the years ended January 31,
2022, 2021 and 2020, the Company recognized interest and penalties of approximately $0.6 million, $1.0 million and $0.7 million, respectively.
8. Leases
We lease most of our current store locations and certain of our facilities and operating equipment under operating leases. The fixed, non-cancelable terms of
our real estate leases are generally five years to fifteen years and generally include renewal options that allow us to extend the term beyond the initial non-
cancelable term. However, prior to the expiration of the existing contract, the Company will typically renegotiate any lease contracts as opposed to
continuing in the current lease under the renewal terms. As such, the lease renewal options are not recognized as part of the right-of-use assets and
liabilities. Most of the real estate leases require payment of real estate taxes, insurance and certain common area maintenance costs in addition to future
minimum lease payments. Equipment leases generally provide for initial lease terms of three years to five years and provide for a purchase right at the end
of the lease term at the then fair market value of the equipment.
Certain operating leases contain tenant allowance provisions, which obligate the landlord to remit cash to us as an incentive to enter into the lease
agreement. We record the full amount to be remitted by the landlord as a reduction to the operating lease right-of-use assets upon commencement of the
lease and amortize the balance on a straight-line basis over the life of the lease.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental lease information is summarized below:
(in thousands)
Assets
Operating lease assets
Finance lease assets
Total leased assets
Liabilities
(1)
Operating
Finance
Operating
Finance
Total lease liabilities
Balance sheet classification
Operating lease right-of-use assets
Property and equipment, net
Operating lease liability - current
Current finance lease obligations
Operating lease liability - non current
Long-term debt and finance lease obligations
January 31,
2022
2021
$
$
$
$
256,267 $
5,851
262,118 $
59,710 $
889
330,439
5,226
396,264 $
265,798
5,813
271,611
53,958
934
354,598
5,138
414,628
(1) Represents the gross operating lease liability before tenant improvement allowances. As of January 31, 2022 and 2021, we had $5.2 million and $9.9
million of tenant improvement allowances to be remitted by the landlord.
Lease Cost
(in thousands)
Operating lease costs
(1)
Total operating lease cost
Income statement classification
Selling, general and administrative expense
Year Ended January 31,
2022
2021
$
$
65,841 $
65,841 $
63,970
63,970
(1) Includes short-term and variable lease costs, which are not significant.
Operating lease right-of-use assets (“ROU Assets”) and liabilities are recognized at the commencement date based on the present value of lease payments
over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments.
Operating lease ROU Assets are regularly reviewed for impairment under the long-lived assets impairment guidance in ASC Subtopic 360-10, Property,
Plant, and Equipment - Overall. No impairment was recognized for the year ended January 31, 2022 and 2021. For the year ended January 31, 2020, we
recognized $1.9 million of impairments of ROU Assets on the consolidated statement of operations from the exiting of certain leases upon relocation of
three of our distribution centers into one facility. See Note 4, Charges and Credits, for additional details.
Additional details regarding the Company’s leasing activities as a lessee are presented below:
Other Information
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases
Weighted-average remaining lease term (in years)
Year Ended January 31,
2022
2021
$
83,675
$
73,983
Finance leases
Operating leases
Weighted-average discount rate
Finance leases
Operating leases
8.7
6.7
5.0 %
7.3 %
9.5
7.2
5.1 %
7.7 %
For the years ended January 31, 2022, 2021 and 2020, total rent expense was $65.8 million, $65.1 million and $58.1 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of our minimum contractual commitments and obligations as of January 31, 2022:
(in thousands)
Year ending January 31,
2023
2024
2025
2026
2027
Thereafter
Total undiscounted cash flows
Less: Interest
Total lease liabilities
9. Stock-Based Compensation
Operating
Leases
Finance Leases
Total
$
$
86,487 $
83,478
73,281
61,635
51,590
139,348
495,819
105,670
390,149 $
1,197 $
1,267
1,103
809
560
2,940
7,876
1,761
6,115 $
87,684
84,745
74,384
62,444
52,150
142,288
503,695
107,431
396,264
On May 28, 2020, our stockholders approved the Conn’s, Inc. 2020 Omnibus Incentive Plan (“2020 Plan”). Upon the effectiveness of the 2020 Plan, no
further awards were, or may in the future, be granted under any of our prior plans, which include the 2016 Omnibus Incentive Plan (“2016 Plan”), 2011
Non-Employee Director Restricted Stock Plan (“2011 Director Plan”) and the 2003 Non-Employee Director Stock Option Plan (“2003 Director Plan”). The
2020 plan provides for the issuance of 1,800,000 shares of Company common stock plus such number of shares as were, and may become, available under
our prior plans. As such, shares subject to an award under the 2020 Plan, the 2016 Plan, the 2011 Plan, the 2011 Director Plan, the 2003 Director Plan or
our Amended and Restated 2003 Incentive Stock Option Plan (“2003 Plan”) that lapse, expire, are forfeited or terminated, or are settled in cash will again
become available for future grant under the 2020 Plan. During fiscal year 2022, a total of 88,053 shares were transferred to the 2020 Plan which all derived
from the 2016 Omnibus Incentive Plan. During fiscal year 2021, a total of 937,514 shares were transferred to the 2020 Plan from the prior plans: 746,299
shares from the 2016 Omnibus Incentive Plan, 2,224 shares from the 2011 Omnibus Incentive Plan, and 48,991 shares from the 2011 Non-Employee
Director Restricted Stock Plan, 140,000 shares from the 2003 Non-Employee Director Stock Option Plan.
Our 2020 Plan is an equity-based compensation plan that allows for the grant of a variety of awards, including stock options, restricted stock awards,
RSUs, PSUs, stock appreciation rights and performance and cash awards. Awards are generally granted once per year, with the amount and type of awards
determined by the Compensation Committee of our Board of Directors (the “Committee”). Stock options, RSUs and PSUs are subject to early termination
provisions but generally vest over a period of three years or four years from the date of grant. Stock options under the various plans are issued with exercise
prices equal to the market value on the date of the grant and, typically, expire ten years after the date of grant.
In the event of a change in control of the Company, as defined in the 2020 Plan, the Board of Directors of the Company (“Board of Directors”) may cause
some or all outstanding awards to fully or partially vest, either upon the change in control or upon a subsequent termination of employment or service, and
may provide that any applicable performance criteria be deemed satisfied at the target or any other level. The Board of Directors may also cause
outstanding awards to terminate in exchange for a cash or stock payment or to be substituted or assumed by the surviving corporation.
As of January 31, 2022, shares authorized for future issuance were: 1,688,373 under the 2020 Plan.
Stock-Based Compensation Expense. Total stock-based compensation expense, recognized primarily in SG&A, from stock-based compensation consisted
of the following:
(in thousands)
Stock options
RSUs and PSUs
Employee stock purchase plan
Accelerated RSU expense charged to severance
Year Ended January 31,
2021
2020
2022
$
$
1,608 $
7,038
269
—
8,915 $
3,908 $
5,058
364
1,255
10,585 $
3,978
8,316
256
—
12,550
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended January 31, 2022, 2021, and 2020, we recognized tax benefits related to stock-based compensation of $1.8 million, $2.3 million and
$1.4 million, respectively. As of January 31, 2022, the total unrecognized compensation cost related to all unvested stock-based compensation awards was
$15.2 million and is expected to be recognized over a weighted-average period of 2.2 years. The total fair value of RSUs, PSUs and stock options vested
during fiscal years 2022, 2021 and 2020 was $14.0 million, $5.1 million and $8.4 million, respectively, based on the market price at the vesting date.
Stock Options.
The following table summarizes the activity for outstanding stock options:
Outstanding, January 31, 2021
Granted
Exercised
Forfeited and expired
Outstanding, January 31, 2022
Vested and expected to vest, January 31, 2022
Exercisable, January 31, 2022
Shares
Under
Option
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
720,166 $
— $
— $
— $
720,166 $
720,166 $
410,083 $
30.49
—
—
—
30.49
30.49
29.09
6.0
6.0
5.9
No stock options were exercised during the years ended January 31, 2022 and January 31, 2021. During the year ended January 31, 2020, the total intrinsic
value of stock options exercised was $0.4 million. The aggregate intrinsic value of stock options outstanding, vested and expected to vest and exercisable at
January 31, 2022 was approximately $0.6 million. The total fair value of common stock options vested during fiscal years 2022, 2021 and 2020 was $7.5
million, $0.3 million and $0.3 million, respectively, based on the market price at the vesting date.
Restricted Stock Units. The restricted stock unit program consists of a combination of PSUs and RSUs. RSUs vest on a straight-line basis over their term,
which is generally three years to four years.
As of January 31, 2022 there are two PSU awards outstanding. Under both PSU awards, the number of PSUs issued is dependent upon attainment of an
annualized Total Shareholder Return (“TSR”) target for the period identified in the award, which is three fiscal years. In the event TSR exceeds the
respective defined target, shares will be awarded in excess of the target amount. For the first award, this is up to a maximum of 150% of the target award,
and for the second award, this is up to 200% of the target award. In the event TSR falls below the respective predefined target, a reduced number of shares
will be awarded. If TSR falls below the respective threshold level, no shares will be awarded. PSUs vest on predetermined schedules, which occur over
three years.
For grants of PSUs, the fair value is the market value of our stock at the date of issuance adjusted for the market condition using a Monte Carlo model. No
dividend yield was included in the weighted average assumptions for the PSUs granted during fiscal years 2022 or 2021. The weighted average fair value
per grant issued is $25.23 and $8.36 for fiscal years 2022 and 2021, respectively. The weighted-average assumptions used in the Monte Carlo valuations
are as follows:
Expected stock price volatility
Risk-free interest rate
Expected life (in years)
Year Ended January 31,
2022
83.0%-87.0%
0.17%-0.67%
3
2021
60.0 %
1.42 %
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity for RSUs and PSUs:
Time-Based RSUs
Performance-Based RSUs
Balance, January 31, 2021
Granted
Vested and converted to common stock
Forfeited
Balance, January 31, 2022
Number of Units
Weighted-
Average Grant
Date Fair Value
13.53
18.91
13.65
14.34
16.88
Number of Units
269,580 $
268,037 $
— $
(48,037) $
489,580 $
Weighted-
Average Grant
Date Fair Value
9.61
25.23
—
13.40
17.79
Total Number of
Units
1,019,474
855,532
(333,429)
(144,656)
1,396,921
749,894 $
587,495 $
(333,429) $
(96,619) $
907,341 $
The total fair value of restricted and performance shares vested during fiscal years 2022, 2021 and 2020 was $6.4 million, $4.8 million, and $8.1 million,
respectively, based on the market price at the vesting date. The total fair value of restricted and performance shares granted during fiscal years 2022, 2021
and 2020 was $17.9 million, $8.0 million and $2.9 million, respectively.
Employee Stock Purchase Plan. Our Employee Stock Purchase Plan is available to our employees, subject to minimum employment conditions and
maximum compensation limitations. At the end of each calendar quarter, employee contributions are used to acquire shares of common stock at 85% of the
lower of the fair market value of the common stock on the first or last day of the calendar quarter. During the years ended January 31, 2022, 2021 and 2020,
we issued 51,262, 140,672 and 53,459 shares of common stock, respectively, to employees participating in the plan, leaving 526,329 shares remaining
reserved for future issuance under the plan as of January 31, 2022.
10. Significant Vendors
As shown in the table below, a significant portion of our merchandise purchases were made from six vendors:
Vendor A
Vendor B
Vendor C
Vendor D
Vendor E
Vendor F
2022
Year Ended January 31,
2021
2020
31.5 %
21.1
11.0
5.0
2.5
2.2
73.3 %
28.9 %
15.4
14.0
7.8
6.8
3.1
76.0 %
33.6 %
16.3
11.0
9.6
9.5
5.7
85.7 %
The vendors shown above represent the top six vendors with the highest volume in each period shown. The same vendor may not necessarily be
represented in all periods presented.
11. Defined Contribution Plan
We have established a defined contribution 401(k) plan for eligible employees. Employees may contribute up to 50% of their eligible pretax compensation
to the plan and we match 100% of the first 3% of the employees’ contributions and an additional 50% of the next 2% of the employees’ contributions. At
our option, we may make supplemental contributions to the plan, but have not made such supplemental contributions in the past three years. Due to the
COVID-19 pandemic, matching contributions were suspended in fiscal year 2021. Matching contributions were resumed during fiscal year 2022. The
matching contributions made by us totaled $2.2 million, $0.0 million and $1.9 million during the years ended January 31, 2022, 2021 and 2020,
respectively.
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12. Contingencies
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities Litigation. On April 2, 2018, MicroCapital Fund, LP, MicroCapital Fund, Ltd., and MicroCapital LLC (collectively, “MicroCapital”) filed a
lawsuit against us and certain of our former executive officers in the U.S. District Court for the Southern District of Texas, Cause No. 4:18-CV-01020 (the
“MicroCapital Action”). The plaintiffs in this action allege that the defendants made false and misleading statements or failed to disclose material facts
about our credit and underwriting practices, accounting and internal controls. Plaintiffs allege violations of sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Texas and Connecticut common law fraud, and Texas common law negligent
misrepresentation against all defendants; as well as violations of section 20A of the Securities Exchange Act of 1934; and Connecticut common law
negligent misrepresentation against certain defendants arising from plaintiffs’ purchase of Conn’s, Inc. securities between April 3, 2013 and February 20,
2014. The complaint does not specify the amount of damages sought.
The Court previously stayed the MicroCapital Action pending resolution of other outstanding litigation (In re Conn’s Inc. Sec. Litig., Cause No. 14-CV-
00548 (S.D. Tex.) (the “Consolidated Securities Action”)), which was settled in October 2018. After that settlement, the stay was lifted, and the defendants
filed a motion to dismiss plaintiff’s complaint in the MicroCapital Action on November 6, 2018. On July 26, 2019, the magistrate judge issued a report
recommending that defendants’ motion to dismiss the complaint be granted in part and denied in part. On September 25, 2019, the district court adopted the
magistrate judge’s report, which permitted MicroCapital to file an amended complaint, which MicroCapital filed on October 30, 2019. Defendants filed
their answer to the amended complaint on November 27, 2019.
The parties reached a settlement agreement in this matter on October 28, 2021, that resolves the claims against the defendants in their entirety, and the case
was dismissed with prejudice on November 18, 2021. Neither the Company nor any individual defendant admitted any wrongdoing.
Derivative Litigation. On December 1, 2014, an alleged shareholder, purportedly on behalf of the Company, filed a shareholder derivative lawsuit in federal
court against us and certain of our current and former directors and former executive officers captioned Robert Hack, derivatively on behalf of Conn’s, Inc.,
v. Theodore M. Wright (former executive officer and former director), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H.
Martin, David Schofman, Scott L. Thompson (former director), Brian Taylor (former executive officer) and Michael J. Poppe (former executive officer)
and Conn’s, Inc., Case No. 4:14-cv-03442 (S.D. Tex.). The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement,
and insider trading based on substantially similar factual allegations as those asserted in the Consolidated Securities Action. The plaintiff seeks unspecified
damages against these persons and does not request any damages from Conn’s. On February 25, 2015, an additional federal derivative action, captioned
95250 Canada LTEE, derivatively on Behalf of Conn’s, Inc. v. Wright et al., Cause No. 4:15-cv-00521 (S.D. Tex.), was filed, asserting substantially similar
claims against the same defendants. It was consolidated with the Hack litigation (collectively, the Federal Derivative Actions).
The parties have reached a settlement in principle to fully resolve the Federal Derivative Actions. The settlement was subject to court approval. An initial
settlement hearing was held before Judge Ellison on February 17, 2022, after which the Court requested additional briefing. Plaintiffs, Defendants, and
State Court Plaintiff and Objector Richard Dohn filed additional briefing and a second settlement hearing was held before Judge Ellison on March 15,
2022. Judge Ellison approved the settlement and entered a Final Order and Judgement dismissing the derivative action with prejudice on March 15, 2022.
Neither the Company nor any individual defendant admits any wrongdoing through the settlement agreement.
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CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the Federal Derivative Actions, a derivative action was filed in Texas state court on January 27, 2015, captioned Richard A. Dohn v. Wright,
et al., Cause No. 2015-04405, in the 281st Judicial District Court, Harris County, Texas. This action makes substantially similar allegations to the Federal
Derivative Actions against the same defendants. This case is stayed until at least April 29, 2022. Counsel for Dohn attended the February 17, 2022 and
March 15, 2022 settlement hearings in the Federal Derivative Actions and objected to the proposed settlement.
Prior to filing his lawsuit, another alleged shareholder, Robert J. Casey II (“Casey”), submitted a demand under Delaware law, which our Board of
Directors refused. On May 19, 2016, Casey, purportedly on behalf of the Company, filed a second state court lawsuit against us and certain of our current
and former directors and former executive officers in the 55th Judicial District Court, Harris County, Texas, captioned Casey, derivatively on behalf of
Conn’s, Inc., v. Theodore M. Wright (former executive officer and former director), Michael J. Poppe (former executive officer), Brian Taylor (former
executive officer), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson (former director), Douglas H. Martin, David Schofman, Scott L.
Thompson (former director) and William E. Saunders Jr., and Conn’s, Inc., Cause No. 2016-33135. The complaint asserts claims for breach of fiduciary
duties and unjust enrichment based on substantially similar factual allegations as those asserted in the Federal Derivative Actions. The complaint does not
specify the amount of damages sought. Since April 2018, this case has been abated pending the resolution of related cases. In July 2021, the parties
requested that the court extend the abatement pending further developments in the Federal Derivative Actions. The case currently remains abated.
Other than Casey, none of the plaintiffs in the other derivative actions made a demand on our Board of Directors prior to filing their respective lawsuits.
The defendants in the two state court derivative actions intend to vigorously defend against these claims. It is not possible at this time to predict the timing
or outcome of any unsettled litigation, and we cannot reasonably estimate the possible loss or range of possible loss from such claims.
We are involved in other routine litigation and claims, incidental to our business from time to time which, individually or in the aggregate, are not expected
to have a material adverse effect on us. As required, we accrue estimates of the probable costs for the resolution of these matters. 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. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate
of reserves for litigation. The Company believes that any probable and reasonably estimable loss associated with the foregoing has been adequately
reflected in the accompanying financial statements.
13. Variable Interest Entities
From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. Under the terms of the
respective securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of the
asset-backed notes, and then to the residual equity holder. We retain the servicing of the securitized portfolio and receive a monthly fee of 4.75%
(annualized) based on the outstanding balance of the securitized receivables, and we currently hold all of the residual equity. In addition, we, rather than the
VIEs, will retain certain credit insurance income together with certain recoveries related to credit insurance and RSAs on charge-offs of the securitized
receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as we consolidate the VIEs.
We consolidate VIEs when we determine that we are the primary beneficiary of these VIEs, we have the power to direct the activities that most
significantly impact the performance of the VIEs and our obligation to absorb losses and the right to receive residual returns are significant.
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CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the assets and liabilities held by the VIEs (for legal purposes, the assets and liabilities of the VIEs will remain distinct from
Conn’s, Inc.):
(in thousands)
Assets:
Restricted cash
Customer accounts receivable:
Customer accounts receivable
Restructured accounts
Allowance for uncollectible accounts
Allowance for no-interest option credit programs
Deferred fees and origination costs
Total customer accounts receivable, net
Total assets
Liabilities:
Accrued expenses
Other liabilities
Due to Conn’s, Inc., net
Long-term debt:
2019-A Class A Notes
2019-A Class B Notes
2019-A Class C Notes
2019-B Class A Notes
2019-B Class B Notes
2019-B Class C Notes
2020-A Class A Notes
2020-A Class B Notes
2020-A Class C Notes
2021-A Class A Notes
2021-A Class B Notes
2021-A Class C Notes
Less deferred debt issuance costs
Total debt
Total liabilities
January 31,
2022
January 31,
2021
$
29,872 $
48,622
463,411
29,621
(97,560)
(10,275)
(5,033)
380,164
410,036 $
2,638 $
3,930
12,755
—
—
—
—
—
—
9,184
18,342
17,695
195,595
66,090
63,890
370,796
(2,871)
367,925
387,248 $
509,574
105,395
(159,849)
(5,502)
(5,503)
444,115
492,737
3,707
4,459
5,661
19,521
25,069
24,202
17,860
85,540
83,270
93,326
65,200
—
—
—
—
413,988
(2,437)
411,551
425,378
$
$
$
The assets of the VIEs serve as collateral for the obligations of the VIEs. The holders of asset-backed notes have no recourse to assets outside of the
respective VIEs.
14. Segment Information
Operating segments are defined as components of an enterprise that engage in business activities and for which discrete financial information is available
that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources and assess performance. We are
a leading specialty retailer and offer a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit
solution for our core consumers. We have two operating segments: (i) retail and (ii) credit. Our operating segments complement one another. The retail
segment operates primarily through our stores and website. Our retail segment product offerings include furniture and mattresses, home appliances,
consumer electronics and home office products from leading global brands across a wide range of
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CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
price points. Our credit segment offers affordable financing solutions to a large, under-served population of consumers who typically have limited credit
alternatives. Our operating segments provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well
as affordable monthly payment options, next day delivery and installation in the majority of our markets, and product repair service. The operating
segments follow the same accounting policies used in our consolidated financial statements.
We evaluate a segment’s performance based upon operating income before taxes. SG&A includes 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 calculated using an annual rate of 2.5% times the average outstanding portfolio
balance for each applicable period.
As of January 31, 2022, we operated retail stores in 15 states with no operations outside of the United States. No single customer accounts for more than
10% of our total revenues.
Financial information by segment is presented in the following tables:
(in thousands)
Revenues:
Furniture and mattress
Home appliance
Consumer electronics
Computers
Other
Product sales
Repair service agreement commissions
Service revenues
Total net sales
Finance charges and other revenues
Total revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expense
Provision for bad debts
Charges and credits
(1)
Total costs and expenses
Operating income
Interest expense
Loss (gain) on extinguishment of debt
Income before income taxes
Additional Disclosures:
Property and equipment additions
Depreciation expense
(in thousands)
Total assets
Year Ended January 31, 2022
Credit
Total
Retail
411,167 $
500,051
191,234
66,707
36,386
1,205,545
89,101
10,743
1,305,389
949
1,306,338
825,987
399,393
479
2,677
1,228,536
77,802
—
—
77,802 $
— $
—
—
—
—
—
—
—
—
283,693
283,693
—
145,097
47,705
—
192,802
90,891
25,758
1,218
63,915 $
411,167
500,051
191,234
66,707
36,386
1,205,545
89,101
10,743
1,305,389
284,642
1,590,031
825,987
544,490
48,184
2,677
1,421,338
168,693
25,758
1,218
141,717
44,618 $
43,728 $
1,392 $
1,721 $
46,010
45,449
Retail
January 31, 2022
Credit
Total
671,920 $
1,082,546 $
1,754,466
$
$
$
$
$
84
Table of Contents
(in thousands)
Revenues:
Furniture and mattress
Home appliance
Consumer electronics
Computers
Other
Product sales
Repair service agreement commissions
Service revenues
Total net sales
Finance charges and other revenues
Total revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expense
Provision for bad debts
Charges and credits
(1)
Total costs and expenses
Operating income (loss)
Interest expense
Loss (gain) on extinguishment of debt
Income (loss) before income taxes
Additional Disclosures:
Property and equipment additions
Depreciation expense
(in thousands)
Total assets
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended January 31, 2021
Credit
Total
Retail
322,770 $
390,964
172,932
65,405
20,960
973,031
78,838
12,442
1,064,311
816
1,065,127
668,315
335,954
443
4,092
1,008,804
56,323
—
—
56,323 $
— $
—
—
—
—
—
—
—
—
320,898
320,898
—
142,813
201,560
2,234
346,607
(25,709)
50,381
(440)
(75,650) $
322,770
390,964
172,932
65,405
20,960
973,031
78,838
12,442
1,064,311
321,714
1,386,025
668,315
478,767
202,003
6,326
1,355,411
30,614
50,381
(440)
(19,327)
55,172 $
39,968 $
824 $
1,100 $
55,996
41,068
Retail
January 31, 2021
Credit
Total
655,666 $
1,099,418 $
1,755,084
$
$
$
$
$
85
Table of Contents
(in thousands)
Revenues:
Furniture and mattress
Home appliance
Consumer electronics
Computers
Other
Product sales
Repair service agreement commissions
Service revenues
Total net sales
Finance charges and other revenues
Total revenues
Costs and expenses:
Cost of goods sold
Selling, general and administrative expense
Provision for bad debts
Charges and credits
(1)
Total costs and expenses
Operating income
Interest expense
Loss (gain) on extinguishment of debt
Income (loss) before income taxes
Additional Disclosures:
Property and equipment additions
Depreciation expense
(in thousands)
Total assets
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended January 31, 2020
Credit
Total
Retail
370,931 $
360,441
221,449
73,074
16,529
1,042,424
106,997
13,814
1,163,235
810
1,164,045
697,784
346,108
905
1,933
1,046,730
117,315
—
—
117,315 $
— $
—
—
—
—
—
—
—
—
379,641
379,641
—
156,916
204,312
1,209
362,437
17,204
59,107
1,094
(42,997) $
370,931
360,441
221,449
73,074
16,529
1,042,424
106,997
13,814
1,163,235
380,451
1,543,686
697,784
503,024
205,217
3,142
1,409,167
134,519
59,107
1,094
74,318
62,244 $
35,783 $
200 $
1,058 $
62,444
36,841
Retail
January 31, 2020
Credit
Total
641,812 $
1,526,957 $
2,168,769
$
$
$
$
$
(1) For the years ended January 31, 2022, 2021 and 2020, the amount of overhead allocated to each segment reflected in SG&A was $40.6 million, $32.0
million and $30.0 million, respectively. For the years ended January 31, 2022, 2021 and 2020, the amount of reimbursement made to the retail segment
by the credit segment was $28.3 million, $34.8 million and $39.1 million, respectively.
15. Stockholders’ Equity
Share Repurchases. On December 15, 2021, our board of directors approved a stock repurchase program pursuant to which the Company is authorized to
repurchase up to $150.0 million of our outstanding common stock. The stock repurchase program expires on December 14, 2022. For the year ended
January 31, 2022, we repurchased 2,603,479 shares of our common stock at an average weighted cost per share of $22.61 for an aggregate amount of $58.9
million.
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16. Subsequent Events
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share Repurchases. For the period February 1, 2022 through March 25, 2022, we repurchased an additional 3,316,000 shares of our common stock for
$68.2 million at an average price of $20.57. The total shares repurchased through March 25, 2022 under the plan in aggregate is 5,919,479 shares for
$127.1 million at an average price of $21.47 per share.
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Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form 10-K, our management conducted an assessment of the effectiveness of our internal
controls over financial reporting as of the end of the period covered by this report (under the supervision and with the participation of our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”)). Based on that assessment, our CEO and CFO have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred in the quarter ended January 31, 2022 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or Rule
15(d)-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management (under the supervision and with the participation of our principal executive officer and our principal financial officer) assessed the
effectiveness of our internal control over financial reporting as of January 31, 2022. In making this assessment, management used the criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the
COSO criteria). Based on our assessment and those criteria, management believes that, as of January 31, 2022, our internal controls over financial
reporting is effective.
The effectiveness of our internal control over financial reporting as of January 31, 2022 has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is included elsewhere herein.
Conn’s, Inc.
The Woodlands, Texas
March 29, 2022
/s/ George L. Bchara
George L. Bchara
Executive Vice President and Chief Financial Officer
/s/ Chandra R. Holt
Chandra R. Holt
President and Chief Executive Officer
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Conn’s, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Conn’s, Inc. and subsidiaries’ internal control over financial reporting as of January 31, 2022, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO
criteria”). In our opinion, Conn’s, Inc. and subsidiaries (the “Company”) maintained, in all material respects, effective internal control over financial
reporting as of January 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets of the Company as of January 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended January 31, 2022, and the related notes and our report dated March 29, 2022 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Houston, Texas
March 29, 2022
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ITEM 9B. OTHER INFORMATION.
On March 25, 2022, the Company and its Executive Chairman of the Board, Mr. Norman L. Miller, mutually agreed that Mr. Miller has completed his
duties as Executive Chairman, and therefore, effective April 1, 2022, Mr. Miller will no longer serve in his capacity as Executive Chairman but will
continue to serve as Director on the Board. Mr. Miller will be entitled to the payments and benefits under his letter agreement with the Company, dated
August 4, 2021.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement in connection with the 2022 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement in connection with the 2022 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement in connection with the 2022 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement in connection with the 2022 Annual Meeting of
Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated herein by reference to our definitive Proxy Statement in connection with the 2022 Annual Meeting of
Stockholders.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
(1) Financial statements:
PART IV
See listing of financial statements included in Item 8. of this Annual Report on Form 10-K.
(2) Financial Statement Schedules:
Financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(3) Exhibits:
Exhibit
Number
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.2
4.1
4.2
4.2.1
4.3
4.3.1
4.4
4.5
Description of Document
Certificate of Incorporation of Conn’s, Inc. (incorporated herein by reference to Exhibit 3.1 to Conn’s, Inc.
registration statement on Form S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003)
Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. dated June 3, 2004 (incorporated herein
by reference to Exhibit 3.1.1 to Form 10-Q for the quarterly period ended April 30, 2004 (File No. 000-50421) as
filed with the Securities and Exchange Commission on June 7, 2004)
Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. dated May 30, 2012 (incorporated
herein by reference to Exhibit 3.1.2 to Form 10-Q for the quarterly period ended April 30, 2012 (File No. 001-
34956) as filed with the Securities and Exchange Commission on June 5, 2012)
Certificate of Correction to the Certificate of Amendment to Conn’s, Inc. Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.1.3 to Form 10-K for the annual period ended January 31, 2014 (File No. 001-
34956) as filed with the Securities and Exchange Commission on March 27, 2014)
Certificate of Amendment to the Certificate of Incorporation of Conn’s, Inc. as filed on May 29, 2014 (incorporated
herein by reference to Exhibit 3.1.4 to Form 10-Q for the quarterly period ended April 30, 2014 (File No. 001-
34956) as filed with the Securities and Exchange Commission on June 2, 2014)
Third Amended and Restated Bylaws of Conn’s, Inc. effective as of December 7, 2020 (incorporated herein by
reference to exhibit 3.2 to Form 10-Q for the quarterly period ended October 31, 2020 (File No. 001-34956) as filed
with the Securities and Exchange Commission on December 4, 2020)
Specimen of certificate for shares of Conn’s, Inc.’s common stock (incorporated herein by reference to Exhibit 4.1 to
registration statement on Form S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on
October 29, 2003)
Base Indenture, dated as of April 24, 2019, by and between the Issuer and the Trustee (incorporated herein by
reference to Exhibit 4.1 to Form 8-K (File No. 001-34956) as filed with the Securities and Exchange Commission on
April 25, 2019)
Series 2019-A Supplement to the Base Indenture, dated as of April 24, 2019, by and between the Issuer and the
Trustee (incorporated herein by reference to Exhibit 4.2 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on April 25, 2019)
Base Indenture, dated as of November 26, 2019, by and between the Issuer and the Trustee (incorporated herein by
reference to Exhibit 4.1 to Form 8-K (File No. 001-34956) as filed with the Securities and Exchange Commission on
November 27, 2019)
Series 2019-B Supplement to the Base Indenture, dated as of November 26, 2019, by and between the Issuer and the
Trustee (incorporated herein by reference to Exhibit 4.2 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on November 27, 2019)
Description of Registrant’s Securities (incorporated herein by reference to Exhibit 4.5 to Form 10-K for the annual
period ended January 31, 2021 (File No. 001-34956) as filed with the Securities and Exchange Commission on
March 31, 2021))
Base Indenture, dated as of October 16, 2020, by and between the Issuer and the Trustee (incorporated herein by
reference to Exhibit 4.1 to Form 8-K (File No. 001-34956) as filed with the Securities and Exchange Commission on
October 20, 2020)
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4.6
4.7
4.8
* 10.1
* 10.1.1
* 10.1.2
* 10.2
* 10.2.1
* 10.3
* 10.3.1
* 10.4
*10.4.1
*10.4.2
*10.4.3
*10.4.4
*10.4.5
*10.4.6
Series 2020-A Supplement to the Base Indenture, dated as of October 16, 2020, by and between the Issuer and the
Trustee (incorporated herein by reference to Exhibit 4.2 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on October 20, 2020)
Base Indenture, dated as of November 23, 2021, by and between the Issuer and the Trustee (incorporated herein by
reference to Exhibit 4.1 to Form 8-K (File No. 001-34956) as filed with the Securities and Exchange Commission on
November 26, 2021)
Series 2021-A Supplement to the Base Indenture, dated as of November 23, 2021, by and between the Issuer and the
Trustee (incorporated herein by reference to Exhibit 4.2 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on November 26, 2021)
Amended and Restated 2003 Incentive Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to
registration statement on Form S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003)
Amendment to the Conn’s, Inc. Amended and Restated 2003 Incentive Stock Option Plan (incorporated herein by
reference to Exhibit 10.1.1 to Form 10-Q for the quarterly period ended April 30, 2004 (File No. 000-50421) as filed
with the Securities and Exchange Commission on June 7, 2004)
Form of Stock Option Agreement under the Amended and Restated 2003 Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 10.1.2 to Form 10-K for the annual period ended January 31, 2005 (File No. 000-
50421) as filed with the Securities and Exchange Commission on April 5, 2005)
2011 Employee Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1.3 to Form 10-Q for the quarterly
period ended April 30, 2011 (File No. 001-34956) filed the Securities and Exchange Commission on May 26, 2011)
Form of Restricted Stock Award Agreement under the 2011 Employee Omnibus Incentive Plan (incorporated herein
by reference to Exhibit 10.1.4 to Form 10-Q for the quarterly period ended April 30, 2011 (File No. 001-34956) as
filed with the Securities and Exchange Commission on May 26, 2011)
2003 Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to registration
statement on Form S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on September
23, 2003)
Form of Stock Option Agreement under the 2003 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.2.1 to Form 10-K for the annual period ended January 31, 2005 (File No. 000-50421) as filed
with the Securities and Exchange Commission on April 5, 2005)
2011 Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.2.2 to Form 10-Q for
the quarterly period ended April 30, 2011 (File No. 001-34956) as filed with the Securities and Exchange
Commission on May 26, 2011)
First Amendment to 2011 Non-Employee Director Restricted Stock Plan effective August 27, 2013 (incorporated
herein by reference to Exhibit 10.1 to Form 10-Q for the quarterly period ended July 31, 2013 (File No. 001-34956)
as filed with the Securities and Exchange Commission on September 5, 2013)
Form of Restricted Stock Award Agreement under the 2011 Non-Employee Director Restricted Stock Plan
(incorporated by reference to Exhibit 10.2.3 to Form 10-Q for the quarterly period ended April 30, 2011 (File No.
001-34956) as filed with the Securities and Exchange Commission on May 26, 2011)
Revised Form of Restricted Stock Award Agreement under the 2011 Non-Employee Director Restricted Stock Plan
(incorporated herein by reference to Exhibit 10.2 to Form 10-Q for the quarterly period ended July 31, 2013 (File
No. 001-34956) as filed with the Securities and Exchange Commission on September 5, 2013)
Revised Form of Restricted Stock Award Agreement under the 2011 Non-Employee Director Restricted Stock Plan
(incorporated herein by reference to Exhibit 10.1 to Form 10-Q for the quarterly period ended April 30, 2015 (File
No. 001-34956) as filed with the Securities and Exchange Commission on June 2, 2015)
Form of Deferral Election Form under the 2011 Non-Employee Director Restricted Stock Plan (incorporated herein
by reference to Exhibit 10.3 to Form 10-Q for the quarterly period ended July 31, 2013 (File No. 001-34956) as filed
with the Securities and Exchange Commission on September 5, 2013)
Revised Form of Deferral Election Form under the 2011 Non-Employee Director Restricted Stock Plan (incorporated
herein by reference to Exhibit 10.2 to Form 10-Q for the quarterly period ended April 30, 2015 (File No. 001-34956)
as filed with the Securities and Exchange Commission on June 2, 2015)
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Table of Contents
* 10.5
*10.5.1
*10.5.2
*10.5.3
*10.5.4
*10.5.5
*10.6
* 10.7
* 10.8
* 10.9
*10.9.1
*10.10
*10.10.1
*10.11
*10.12
*10.13
*10.14
*10.15
2016 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 99.1 to registration statement on
Form S-8 (File No. 333-211584) as filed with the Securities and Exchange Commission on May 25, 2016)
Amended 2016 Omnibus Stock Incentive Plan (incorporated herein by reference to Appendix A to Conn’s, Inc.
Definitive Proxy Statement on Schedule 14A (File No. 001-34956) as filed with the Securities and Exchange
Commission on April 17, 2017)
Form of Restricted Stock Unit Award Agreement (Time-based and Performance-based Vesting) under the 2016
Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 to Form 10-Q for the quarterly
period ended July 31, 2016 (File No. 001-34956) as filed with the Securities and Exchange Commission on
September 8, 2016)
Form of Restricted Stock Unit Award Agreement (Time-based vesting) under the 2016 Omnibus Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.5 to Form 10-Q for the quarterly period ended July 31, 2016
(File No. 001-34956) as filed with the Securities and Exchange Commission on September 8, 2016)
Form of Performance-Based Restricted Stock Unit Award Agreement relating to fiscal year 2017 Special Equity
Awards under the 2016 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.5.3 to Form
10-K for the annual period ended January 31, 2017 (File No. 001-34956) as filed with the Securities and Exchange
Commission on April 4, 2017)
Form of Restricted Stock Unit Award Agreement relating to fiscal year 2017 Special Equity Awards under the 2016
Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.5.4 to Form 10-K for the annual
period ended January 31, 2017 (File No. 001-34956) as filed with the Securities and Exchange Commission on April
4, 2017)
Conn’s, Inc. 2020 Omnibus Equity Plan (incorporated herein by reference to Appendix A of the Company’s
Definitive Proxy Statement on Schedule 14A (File No. 001-34956) as filed with the Securities and Exchange
Commission on April 14, 2020)
Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.3 to registration statement on Form
S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003)
Conn’s 401(k) Retirement Savings Plan (incorporated herein by reference to Exhibit 10.4 to registration statement on
Form S-1 (File No. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003)
Executive Severance Agreement by and between Norman Miller and Conn’s Inc., dated as of September 7, 2015
(incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on September 9, 2015)
Letter Agreement from Conn’s, Inc. to Norman L. Miller, dated as of January 2, 2017 (incorporated by reference to
Exhibit 10.1 to Form 8-K (File No. 001-34956) filed with the Securities and Exchange Commission on January 6,
2017)
Offer of employment from Conn’s Inc. to Lee A. Wright, dated as of May 31, 2016 (incorporated herein by reference
to Exhibit 10.1 to Form 8-K (File No. 001-34956) filed with the Securities and Exchange Commission on June 2,
2016)
Executive Severance Agreement by and between Lee A. Wright and Conn’s Inc., dated as of May 31, 2016
(incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 001-34956) filed with the Securities and
Exchange Commission on June 2, 2016)
Offer of employment from Conn’s Inc. to George Bchara, dated as of December 9, 2016 (incorporated by reference
to Exhibit 10.1 to Form 8-K (File No. 001-34956) filed with the Securities and Exchange Commission on December
14, 2016)
Executive Severance Agreement by and between Rodney Lastinger and Conn’s Inc., dated as of June 3, 2019
(incorporated herein by reference to Exhibit 10.1 to Form 10-Q (File No. 001-34956) filed with the Securities and
Exchange Commission on September 3, 2019)
Executive Severance Plan (incorporated herein by reference to Exhibit 10.14 to Form 10-Q for the quarterly period
ended October 31, 2014 (File No. 001-34956) as filed with the Securities and Exchange Commission on December
8, 2015)
Offer Letter, dated July 30, 2021, between Conn’s, Inc. and Chandra Holt (incorporated herein by reference to
Exhibit 10.1 to Conn’s, Inc.’s Current Report on Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on August 5, 2021)
Executive Severance Agreement, dated as of August 9, 2021, between Conn’s, Inc. and Chandra Holt (incorporated
herein by reference to Exhibit 10.2 to Conn’s, Inc.’s Current on Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on August 5, 2021)
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*10.16
10.17
**10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
Letter Agreement, dated August 4, 2021, between Conn’s, Inc. and Norman L. Miller. (incorporated herein by
reference to Exhibit 10.3 to Conn’s, Inc.’s Current on Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on August 5, 2021)
Amended and Restated Executive Severance Plan (incorporated herein by reference to Exhibit 10.1 to Form 10-Q for
the quarterly period ended July 31, 2020 (File No. 001-34956) as filed with the Securities and Exchange
Commission on September 3, 2020)
Fifth Amended and Restated Loan Agreement, dated March 29, 2021, by and among the Company, as parent and
guarantor, Conn Appliances, Inc., Conn Credit I, LP and Conn Credit Corporation, Inc., as borrowers, certain banks
and financial institutions named therein, as lenders, and Bank of America N.A., in its capacity as agent for lenders
(incorporated herein by reference to Exhibit 10.15 to Form 10-K for the annual period ended January 2021 (File No.
001-34956) as filed with the Securities and Exchange Commission on March 31, 2021)
Omnibus Amendment and Reaffirmation of Existing Ancillary Documents, dated as of October 30, 2015, by and
among Conn’s Inc., Conn Appliances, Inc., Conn Credit I, LP, and Conn Credit Corporation, Inc., the guarantors
party thereto and Bank of America, N.A., in its capacity as agent for lenders (incorporated herein by reference to
Exhibit 10.2 to Form 8-K (File No. 001-34956) as filed with the Securities and Exchange Commission on November
2, 2015)
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.16 to registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and Exchange Commission on September 23, 2003)
First Receivables Purchase Agreement, dated April 24, 2019, by and between the Seller and the Depositor
(incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on April 25, 2019)
Second Receivables Purchase Agreement, dated April 24, 2019, by and between the Seller and the Receivables Trust
(incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on April 25, 2019)
Purchase and Sale Agreement, dated April 24, 2019, by and between the Seller and the Receivables Trust
(incorporated herein by reference to Exhibit 10.3 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on April 25, 2019)
Servicing Agreement dated as of April 24, 2019, by and among the Issuer, the Receivables Trust, the Servicer and
the Trustee (incorporated herein by reference to Exhibit 10.4 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on April 25, 2019)
Note Purchase Agreement, dated November 19, 2019, by and among Conn Appliances, Inc., Conn’s Receivables
Funding 2019-B, LLC, Conn Appliances Receivables Funding, LLC, Conn’s, Inc. and the Initial Purchasers
(incorporated herein by reference to Exhibit 1.1 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on November 22, 2019)
First Receivables Purchase Agreement, dated November 26, 2019, by and between the Seller and the Depositor
(incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on November 27, 2019)
Second Receivables Purchase Agreement, dated November 26, 2019, by and between the Seller and the Receivables
Trust (incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 001-34956) as filed with the Securities
and Exchange Commission on November 27, 2019)
Purchase and Sale Agreement, dated November 26, 2019, by and between the Seller and the Receivables Trust
(incorporated herein by reference to Exhibit 10.3 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on November 27, 2019)
Servicing Agreement dated as of November 26, 2019, by and among the Issuer, the Receivables Trust, the Servicer
and the Trustee (incorporated herein by reference to Exhibit 10.4 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on November 27, 2019)
Note Purchase Agreement, dated November 19, 2019, by and among Conn Appliances, Inc., Conn’s Receivables
Funding 2019-B, LLC, Conn Appliances Receivables Funding, LLC, Conn’s, Inc. and the Initial Purchasers
(incorporated herein by reference to Exhibit 1.1 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on November 22, 2019)
First Receivables Purchase Agreement, dated October 16, 2020, by and between the Seller and the Depositor
(incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on October 20, 2020)
Second Receivables Purchase Agreement, dated October 16, 2020, by and between the Seller and the Receivables
Trust (incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 001-34956) as filed with the Securities
and Exchange Commission on October 20, 2020)
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10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
*10.42
21
23.1
31.1
31.2
32.1
101
104
Purchase and Sale Agreement, dated October 16, 2020, by and between the Seller and the Receivables Trust
(incorporated herein by reference to Exhibit 10.3 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on October 20, 2020)
Servicing Agreement dated as of October 16, 2020, by and among the Issuer, the Receivables Trust, the Servicer and
the Trustee (incorporated herein by reference to Exhibit 10.4 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on October 20, 2020)
Note Purchase Agreement, dated November 17, 2021, by and among Conn Appliances, Inc., Conn’s Receivables
Funding 2021-A, LLC, Conn Appliances Receivables Funding, LLC, Conn’s, Inc. and the Initial Purchasers
(incorporated herein by reference to Exhibit 1.1 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on November 18, 2021)
First Receivables Purchase Agreement, dated November 23, 2021, by and between the Seller and the Depositor
(incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on November 26, 2021)
Second Receivables Purchase Agreement, dated November 23, 2021, by and between the Seller and the Receivables
Trust (incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 001-34956) as filed with the Securities
and Exchange Commission on November 26, 2021)
Purchase and Sale Agreement, dated November 23, 2021, by and between the Seller and the Receivables Trust
(incorporated herein by reference to Exhibit 10.3 to Form 8-K (File No. 001-34956) as filed with the Securities and
Exchange Commission on November 26, 2021)
Servicing Agreement dated as of November 23, 2021, by and among the Issuer, the Receivables Trust, the Servicer
and the Trustee (incorporated herein by reference to Exhibit 10.4 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on November 26, 2021)
Third Omnibus Amendment, dated as of February 6, 2018, among Conn’s Receivables Warehouse, LLC, Conn
Appliances, Inc., Wells Fargo Bank, National Association, Credit Suisse AG, New York Branch, Conn’s Receivables
Warehouse Trust, Conn Appliances Receivables Funding, LLC, Credit Suisse AG, Cayman Islands Branch and Conn
Credit I, LP. (incorporated herein by reference to Exhibit 10.1 to Form 8-K/A (File No. 001-34956) as filed with the
Securities and Exchange Commission on February 13, 2018)
Fourth Omnibus Amendment, dated as of July 9, 2018, among Conn’s Receivables Warehouse, LLC, Conn
Appliances, Inc., Wells Fargo Bank, National Association, Credit Suisse AG, New York Branch, Conn’s Receivables
Warehouse Trust, Conn Appliances Receivables Funding, LLC, Credit Suisse AG, Cayman Islands Branch and Conn
Credit I, LP (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-34956) as filed with the
Securities and Exchange Commission on July 12, 2018)
General Release and Waiver, dates as of January 29, 2021, between Conn's, Inc. and Lee Wright (incorporated herein
by reference to Exhibit 10.44 to Form 10-K for the annual period ended January 31, 2021 (File No. 001-349656) as
filed with the Securities and Exchange commission on March 31, 2021)
Subsidiaries of Conn’s, Inc. (filed herewith)
Consent of Ernst & Young LLP (filed herewith)
Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed herewith)
Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) (filed herewith)
Section 1350 Certification (Chief Executive Officer and Chief Financial Officer) (furnished herewith)
The following financial information from our Annual Report on Form 10-K for the annual period ended January 31,
2022, filed with the SEC on March 29, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL):
(i) consolidated balance sheets as of January 31, 2022 and 2021, (ii) consolidated statements of operations for the
fiscal years ended January 31, 2022, 2021 and 2020, (iii) consolidated statements of comprehensive income for the
fiscal years ended January 31, 2022, 2021 and 2020, (iv) consolidated statements of stockholders’ equity for the
fiscal years ended January 31, 2022, 2021 and 2020, (v) consolidated statements of cash flows for the fiscal years
ended January 31, 2022, 2021 and 2020, and (vi) notes to consolidated financial statements
Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)
* Management contract or compensatory plan or arrangement.
** Schedules and exhibits to this Exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to
furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC.
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ITEM 16. FORM 10-K SUMMARY.
None.
96
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date:
March 29, 2022
CONN’S, INC.
(Registrant)
By:
/s/ Chandra R. Holt
Chandra R. Holt
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Chandra R. Holt
Chandra R. Holt
/s/ George L. Bchara
George L. Bchara
/s/ Ryan R. Nelson
Ryan R. Nelson
/s/ Norman Miller
Norman Miller
/s/ Bob L. Martin
Bob L. Martin
/s/ William E. Saunders Jr.
William E. Saunders Jr.
/s/ Douglas H. Martin
Douglas H. Martin
/s/ David Schofman
David Schofman
/s/ James Haworth
James Haworth
/s/ Oded Shein
Oded Shein
/s/ Sue Gove
Sue Gove
Chief Executive Officer and President
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Executive Chairman
Director
Director
Director
Director
Director
Director
Director
97
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
March 29, 2022
SUBSIDIARIES OF CONN’S, INC.
Exhibit 21
Subsidiary
Conn Appliances, Inc.
Conn Credit Corporation, Inc.
CAI Holding, LLC
CAI Credit Insurance Agency, Inc.
Conn Credit I, LP
Conn Lending, LLC
Conn’s Receivables Funding I GP, LLC
Conn’s Receivables, LLC
Conn’s Receivables Funding I, LP
Conn Appliances Receivables Funding, LLC
Conn’s Receivables Warehouse LLC
Conn’s Receivables Warehouse Trust
Conn’s Receivables Funding 2019-B, LLC
Conn’s Receivables 2019-B Trust
Conn’s Receivables Funding 2020-A, LLC
Conn’s Receivables 2020-A Trust
Conn’s Receivables Funding 2021-A, LLC
Conn’s Receivables 2021-A Trust
Jurisdiction
Texas
Texas
Delaware
Louisiana
Texas
Delaware
Texas
Delaware
Texas
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-111280) pertaining to the 2003 Non-Employee Director Stock Option Plan of Conn’s, Inc.,
(2) Registration Statement (Form S-8 No. 333-111281) pertaining to the Amended and Restated 2003 Incentive Stock Option Plan of Conn’s, Inc.,
(3) Registration Statement (Form S-8 No. 333-111282) pertaining to the Employee Stock Purchase Plan of Conn’s, Inc.,
(4) Registration Statement (Form S-8 No. 333-139208) pertaining to the 2003 Non-Employee Director Stock Option Plan and Amended and Restated
2003 Incentive Stock Option Plan of Conn’s, Inc.,
(5) Registration Statement (Form S-8 No. 333-174997) pertaining to the 2011 Omnibus Incentive Plan of Conn’s, Inc.,
(6) Registration Statement (Form S-8 No. 333-174998) pertaining to the 2011 Non-Employee Director Restricted Stock Plan of Conn’s, Inc.,
(7) Registration Statement (Form S-8 No. 333-211584) pertaining to the 2016 Omnibus Incentive Plan of Conn’s, Inc.,
(8) Registration Statement (Form S-3 No. 333-261325) of Conn’s, Inc.,
(9) Registration Statement (Form S-8 No. 333-218555) pertaining to the Amended 2016 Omnibus Incentive Plan of Conn’s, Inc.
(10)Registration Statement (Form S-8 No. 333-252257) pertaining to the Conn’s Inc. 2020 Omnibus Equity Plan
of our reports dated March 29, 2022, with respect to the consolidated financial statements of Conn’s, Inc. and the effectiveness of internal control over
financial reporting of Conn’s, Inc. included in this Annual Report (Form 10-K) for the year ended January 31, 2022.
/s/ Ernst & Young LLP
Houston, Texas
March 29, 2022
I, Chandra R. Holt, certify that:
1.
I have reviewed this annual report on Form 10-K of Conn’s, Inc.;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF EXECUTIVE OFFICER)
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
/s/ Chandra R. Holt
Chandra R. Holt
Chief Executive Officer and President
Date: March 29, 2022
I, George L. Bchara, certify that:
1.
I have reviewed this annual report on Form 10-K of Conn’s, Inc.;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF FINANCIAL OFFICER)
EXHIBIT 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
/s/ George L. Bchara
George L. Bchara
Executive Vice President and Chief Financial Officer
Date: March 29, 2022
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Conn’s, Inc. (the “Company”) on Form 10-K for the period ended January 31, 2022 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), we, Chandra R. Holt, Chief Executive Officer and President of the Company, and George L.
Bchara, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Chandra R. Holt
Chandra R. Holt
Chief Executive Officer and President
/s/ George L. Bchara
George L. Bchara
Executive Vice President and Chief Financial Officer
Dated: March 29, 2022
A signed original of this written statement required by Section 906 has been provided to Conn’s, Inc. and will be retained by Conn’s, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350
and is not being filed as part of the Report or as a separate disclosure document.