Why Conn's Is Hot Again: Electronics Retailer Has Secret Weapon

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Consumer electronics retailing was a hot sector for investors last year, but results haven't been nearly so rosy in 2014. Best Buy (BBY) shares more than tripled in 2013, but they're trading 35 percent lower so far this year. Shares of hhgregg (HGG) nearly doubled last year, but the stock has fallen 27 percent in 2014.

Then we have Conn's (CONN). It soared 157 percent last year, but it led the retail laggards of 2014 by shedding half of its value during this year's freshman quarter. However, Conn's did rally last week, soaring 16 percent during an otherwise uninspiring week for stocks. Conn's was Nasdaq's fifth biggest gainer on the week, fueled by an encouraging quarterly report.

Pros and Conn's

Unlike Best Buy and hhgregg, which struggled during the holiday quarter, Conn's had no problem keeping its cash registers buzzing. Revenue climbed 44 percent to $361.1 million, fueled by expansion and a juicy 33 percent spike in same-store sales. Conn's, which operates in six states, was able to open 14 more stores in six new markets.

Gross margins expanded, leading adjusted operating income to skyrocket 147 percent. Adjusted diluted earnings only climbed 37 percent as the superstore had to increase its provision for bad debts, but Conn's also revealed that the picture of its deadbeat borrowers has been improving since the end of the quarter.

Wall Street was expecting slightly more in sales and earnings, but the stock still rallied on the encouraging words about the improvement in its delinquencies. Conn's sells a lot of big-ticket items on credit, so getting more customers to pay up should translate into healthy gains on the bottom line.

It's a Housing Play

There hasn't been a lot of growth among Conn's publicly traded peers during the holiday quarter. We saw hhgregg suffer a 12 percent plunge in sales, weighed down by weakness in consumer electronics as well as its computing and wireless products.

Best Buy also saw sales for the seasonally potent quarter decline. Best Buy blamed sluggishness in digital imaging, movies, and home theater for the negative store-level performance.

Things were even uglier at RadioShack (RSH). The small-box chain saw comparable-store sales tumble 19 percent during the holiday quarter. Matters are so bad at RadioShack that it's planning to close as many as 1,100 underperforming stores.

So why is Conn's thriving at a time when rivals are floundering? Look no further than the improving residential real estate market.

Mattresses, appliances and furniture pieces make up nearly half of Conn's sales. That makes it a stealth play on the real estate market, and given the housing boom, it's not a surprise to see folks buying more washing machines and beds than computers and phones.

Some of these items not only cost more, but they carry larger markups. So, while furniture pieces and mattresses made up just 26 percent of the quarter's sales, they accounted for 37 percent of the gross profit. Appliance sales also rose an encouraging 31 percent, fueled by even stronger growth in laundry, refrigerators and cooking devices.

The Future's Bright for Now

Conn's provided upbeat guidance alongside last week's quarterly report. Sales growth will decelerate, but it will continue to move in the right direction. Conn's is forecasting same-store sales to climb 5 percent to 10 percent in fiscal 2015 that began a few weeks ago. It also expects to add as many as 20 new stores.

Analysts see RadioShack, Best Buy and hhgregg all posting lower sales this year than they did the year before. Conn's is targeting profitability to clock in between $3.40 a share and $3.70 a share, well above the $2.57 a share it rang up in fiscal 2014.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days. ‚Äč

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