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Click here for CONNS most recent 10-k.
CONNS INC (NASDAQ: CONN)
Conn’s Inc. is a publicly traded American furniture, mattress, electronics and appliance store chain headquartered in The Woodlands, Texas, United States.
Conn’s is a specialty retailer currently operating 150+ retail locations in Alabama, Arizona, Colorado, Florida, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.
As of 5/20/2022 the business has a market capitalization of $286,390,000 with 23.7 million shares outstanding at a price of $12.04 per share.
Based on the balance sheet figures from March 2022, the business had a book value of $614,819,000. The business has no goodwill or intangible assets, as such the book value is equal to the tangible book value. The business is selling on the market for $328 million less than its liquidation value. Book value per share was $25.84 as of 1/31/22, more than double the current market price. Of important note, the business has successfully managed to increase its shareholders equity consistently with the exception of the period 2/1/2020-1/31/2021, due to COVID and mandatory lockdowns.
Conn’s Inc has a price to book ratio of .47. Generally, a business selling below its book value is a distressed business which has been losing money. However, if we look at Conn’s performance over the years, we see a business which has been able to consistently post profits.
With the exception of the period ending 1/31/2021. Conn’s has posted consistent profits. The average profit over the past 5 years (including the loss year) is $48.27 million. Adjusted to exclude the loss year, average profit for the past 5 years is $61 million. One important note, the large increase in earnings for 2022 is not related to sales growth as the sales levels are comparable to 2018 and 2019. The jump in net income appears to be primarily related to their provision for bad debts. The business adjusted how it records bad debt in the most recent year, significantly reducing the balance and as a result increasing income.
What is really interesting about Conn’s is their cash flow information. 2021 saw free cash inflows in excess of the current market cap! FCF was $406 million in 2021. The average FCF over the past 5 years is $142,568,400
Additionally, the business repurchased $121.6 million in shares between 2020 and 2022. Note: no shares were repurchased in 2021. Furthermore, in December 2021 the board authorized a $150 million dollar share repurchase plan, with the authorization expiring December 14th 2022. As of March 2022, Conn had repurchased 5.9 million shares at an average price 21.41 per share which equates to approximately 20% of the company’s outstanding shares as of the prior reporting date in October 31 2021.
You may be wondering, how can a business with a tangible book value of $600 million, consistent profits, hundreds of millions in free cash flows and share buybacks of $150 million be valued at a mere $268 million?
If we take a look at the share statistics, one explanation is to look at how shorted the stock is. 25% of shares are shorted and 66% of the float is shorted. The large amount of short positions are partly responsible for dragging the share price down. This makes the stock one of the most shorted stocks on the market today. Insider confidence appears strong however, 33% of shares are held by insiders. Attempting to ascertain the reasons behind the massive short position on this stock is difficult. However, we can make some assumptions.
Assumption 1: retail as a whole is being beaten down by the market. Likely due to continued increases in cost, as well as increased financing costs due to increasing interest rates.
Assumption 2, there exist the possibility that the valuations performed by institutions are inadequate for Conn’s operations. Per the most recent 10-k, 51% of purchases were financed through Conn’s in-house credit program. As such, much of the cash in the business is used up to buy inventory which is then lent out. In this respect, Conn acts more like a bank than a regular retailer because all of their liquidity is being used up to provide financing for their customers. Hence their balance sheet looks more similar to a banks balance sheet than a specialty retailers balance sheet. This results in low cash on hand, particularly in relation to debt held by the business.
Using the most recent balance sheet figures in a valuation. Calculating equity value using the conventional approach of adding cash and subtracting debt leads to an equity valuation below book value due to the businesses unique structure. Regardless of the Enterprise Value calculated by discounted cash flows, the equity value will be $514.4 million lower due to the respective cash and debt balances.
If assumption 1 and 2 are true, this could create a negative feedback loop resulting in a lower EV/EBITDA ratio, which if used by a large number of marginal investors in the market, would lead to valuations being further off. The current EV/EBITDA multiple for Conn’s in 1.3x. If any large institution uses a pure exit multiple as a part of their valuation, they are likely to be significantly off in their valuation.
CONCLUSION:
Based on the earnings of $48-$61 million on average for the past 5 years and average cash flows of $142 million over the past five years or $71 million if we exclude 2021. The business should be selling at no lower than its book value. Based on the current number of shares outstanding the price per share should be no less than $25.85.
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