Conn's Picked as Small Cap Momentum and Value Play by Jefferies

Equities Staff  |

Conn's CONN, the home furnishings and appliance retailer, has been named as one of investment bank Jefferies' current picks for momentum and value.

Jefferies released a list of 17 mostly small cap names on Thursday, and Conn's is the smallest of the selections with a market capitalization of just $673 million.

The investment bank cited some large cap names, including PACCAR  PCAR, Delta  DAL, KeyCorp  

KEY, Advance Auto Parts  AAP

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 and Juniper Networks  JNPR.

The retailer operates 157 stores in 15 states, mostly in the southern US.

Differentiated value proposition

Conn's operates a retail plus credit model across all of its stores, offering customers name brands at a competitive price with the convenience of in-house, point-of-sale financing options and "white glove" next day delivery service.

It would require significant capital for a competitor to duplicate the model in the company's markets.

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Image source: Conn's fiscal Q3 2022 presentation, Dec. 7, 2021

Investment thesis

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We agree with Jefferies. While we may not be strong proponents of momentum trading, we think Conn's value is hard to ignore at the current modest market cap. 

The stock has had a strong run over the past two years, fueled in part by the COVID-19 pandemic and the increased attention that people working from home focused on their surroundings. Moreover, Conn's has been resilient in the face of the recent market swoon.

Other factors to consider:

  • Conn's moved quickly to de-risk its balance sheet in March 2020, the early days of the pandemic. From October 2020 to October 2021, the company dramatically decreased its 60+ day delinquency balance from $141 million to $96 million via tighter underwriting and enhanced credit strategies. We appreciate that the company acted quickly and decisively.
  • Conn's in-house credit accounted for 53% of sales in fiscal Q3, growing at 31% year-over-year.
  • The company has increased operating cash flow while reducing net debt and lowering its effective interest rate.
  • Conn's has guided the street to same store sales growth in the mid-teens for the full fiscal year that ended Jan. 31, 2022. 
  • The company opened 12 new stores in fiscal 2022, after slowing down the previous year due to the pandemic.
  • Conn's has accelerated investment in its e-commerce capabiities to become a true omnichannel retailer.
  • The company is due to report earnings on March 30, 2022, so investors have a fair window now to participate.

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Source: Equities News

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