Ticker: CONN Recommendation: BUY ↑ Reported price: $25.53 Price Target: $50.00 Time Frame: 12 Months

Loyola University Chicago Rambler Investment Fund

Highlights

Conn’s Inc. stock price is currently under-performed which stood at a low of 52-week range $14.02 - $51.99

The oil price is at a low figure, currently standing at $49.29. Due to the low oil price, it promotes excess cash for consumers to purchase other goods. However, a lag is expected.

The consumer optimism plunged in early February due to the concern over employment and wages, as well as concern regarding the U.S economy in general. According to the statistical data from Reuters and Michigan on Consumer Sentiment Index, the current data still shows a recent higher consumer optimism measurement than any other data since January 2007.

Favorable forecast shows personal consumption expenditures will grow by 3.3% by 2015.

Because of the unusual winter storms transpiring across the Northeast and Midwest, there was a decline in consumers. However, this is expected to recover shortly.

U.S. GDP has improved sharply since 2006, with an annual rate of 2.6% in the fourth quarter of 2014. Real personal consumption expenditures increased 4.3% in the fourth quarter, compared to an increase of 3.2% in the third.

U.S. GDP growth slowing down in Q4 is reflected by a reduction in government spending. Nevertheless, there are increased imports, exports, personal consumption expenditures, etc. in this quarter.

U.S. Initial Jobless Claims fell more than expected— at 317 in January 2015 comparing to 283 as the current rate.

U.S. Unemployment Rate fell sharply, according to the data on April 2014 (6.7%), compared to 5.7% currently.

Stifel Financial Corporation upgraded CONN to “Hold → BUY”.

Business Description

Conn’s Inc. is a specialty retailer with approximately 3600 full-time employees and 90 retail locations in Arizona, Colorado, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. Conn’s Inc. businesses consists of selling furniture and related accessories for the living room, dining room and bedroom, as well as traditional and specialty mattresses; home appliances, including refrigerators, freezers, washers, dryers, dishwashers and ranges; some other variety of consumer electronics, including LCD, LED, 3-D, Ultra HD and plasma televisions, Blu-ray players, home theater and video game products, digital cameras and portable audio equipment; and home office products, including computers, tablets, printers and accessories. Conn’s Inc. also offers a variety of products on a seasonal basis. Unlike other competitors, Conn’s Inc. provides flexible in-house credit options for their customers in addition to third-party financing programs and third-party rent-to-own payment plans.

Conn’s Businesses

23%

22%

20%

8%

6%

17%

1% 3%

Consumer Electronics Home Appliance Furniture and Mattress Home Office

Repair service agreement commission Finance Charges and other Service Revenues Other

Consumer Discretionary Sector

Conn’s Inc. is currently under-performed in comparison to S&P 500, Consumer Staples Select Sector (XLP), Consumer Discretionary Select Sector (XLY) and its competitors. That being said, however, Conn’s Inc. is recovering after its drawdown, bringing the gross profit margin for Conn’s Inc. to stand at 52.43%.

Specialty Retail Industry in Consumer Discretionary presently stands at +37.47% in one year, which has the highest growth percentage among other industries in the same sector.

SWOT AnalysisStrengths

Conn’s Inc.’s in-house financing programs offer its customers a financing choice that other institutions and retail stores may not be able to.

When analyzing Conn’s Inc.’s store locations across the U.S., it is evidently proven that they are using a strategy which acquires sales by providing a more affordable financing program to those located in regions known to be credit constrained.

Conn’s Inc. offers a selection of diversified retail stores in many different regions across the U.S., which stock varied retail products from a multitude of industries, such as consumer electronics, furniture, home office, financing programs, repair services, and others.

Low-prices and bargaining powers are guaranteed to their customers because of the company’s relationship with numerous manufacturing businesses. Since Conn’s Inc. has a large number of its suppliers in electronics and furniture manufacturing, they are not only able to assure they will get the best price available (In order to provide the best price to their customers, as well as to maximize their profits), but also will have a wide range of substitute suppliers, if necessary.

According to the U.S. Department of Commerce, over the past five years, the retail industry has outperformed and is increasing sharply along with the U.S. economy.

Conn’s Inc. has passed Growth, Profitability, Solvency and Efficiency analyses.

Weaknesses

Conn’s Inc. is a mid-cap company in a very competitive pool among its peers (Best Buy, Wal-Mart and Sears).

The company failed to meet earnings expectations as well as its solvency ratio.

Opportunities

Low oil prices provide an enormous advantage to the retail industry, especially Conn’s Inc.

Conn’s Inc.’s stock price is within a low-fluctuation in 52wk Range. Based on GPSE analysis, Conn’s Inc. has proved to be very profitable and is growing radically.

The U.S. economy is recovering from the economic crisis of 2008 which result in the stimulation for consumers to purchase products in retail stores.

Threats

The threat of new company entering the retail businesses is moderate, but the threat of an online retail store is much more prominent because there are already numerous competitive online retail store that provides an easier way for consumers to shop. Also, the e-commerce industry is growing sharply along with the rise of technology.

Consumer credit’s threat of entry for Conn’s Inc. is comparatively low, since some companies are unable to offer a sufficient fund of their own to provide an in-house financing program. Furthermore, Consumer Credit Company is required to have a reputable character.

According to the U.S Business cycle, the U.S. economy is currently in an expansion stage, and a new recession is coming soon.

GPSE Analysis

2011 2012 2013 2014

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Growth Analysis

Revenue Net Income

Growth Ratio Revenue Net Income

2014 1.19B 93.45M2013 865.03M 52.61M2012 792.3M (3.72M)2011 790.52M (1.01M)

Increment Revenue Net Income

2013 → 2014 ↑153.97M

↑40.84M

2012 2013 ↑72.73M ↑45.172011 → 2012 ↑1.78M ↓2.71M

Since 2011, Conn’s Inc. has grown dramatically. According to growth analysis model, a bullish trend in the growth ratio has developed and Conn’s Inc. is expected to grow approximately double its current size.

Revenue from 790.52M to 1.19B Net Income from (1.01M) to 93.45M

Profitability

2011 2012 2013 2014

-10.00%

0.00%

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Gross Profit Margin Operating Profit Margin Net Profit MarginReturn on Equity Return on Assets

2014 2013 2012 2011Return on Sales Gross profit margin 50.2% 46.7% 40.8% 37.8%

Operating profit Margin

13.6% 11.6% 3.7% 3.6%

Net profit margin 7.83% 6.08% -0.47% -0.13%Return on Investment

Return on equity (ROE) 17.57% 12.71% -1.05% -0.29%

Return on assets (ROA) 8.47% 6.21% -0.46% -0.14%

Conn’s Inc.’s gross profit margin elevated from 2011 to 2014 with an increment rate around 4.13% a year.

Conn’s Inc.’s operating profit margin slightly increased from 2011 to 2012 with an increment of 0.1%, but then significantly improved from 2013 to 2014 with an increment of more than triple the rate of year 2012.

Conn’s Inc.’s net profit margin deteriorated from 2011 to 2012 but outperformed itself from 2013 to 2014. During 2012 to 2013, Conn’s Inc.’s Net profit margin increased significantly from -0.47% to 6.08% which is a 5.61% gain. From 2013 to 2014, its net profit margin has improved for roughly 1.75%.

Conn’s Inc.’s ROE deteriorated from 2012 to 2013 with an increment rate of -0.76% but then improved dramatically from 2013 to 2014, exceeding 2012’s level by more than 17%.

Conn’s Inc.’s ROA deteriorated from 2012 to 2013 with an increment rate of -0.32%. However, from 2013 to 2014, Conn’s Inc.’s ROA has outperformed itself, and in 2014, it stood at 8.47% - an 8.61% gain since 2011.

Solvency

2011 2012 2013 20140

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Debt/Equity Debt/Capital Interest Coverage

2011 2012 2013 2014Debt/Equity 1.37 1.22 0.92 1.20Debt/Capital 0.57 0.55 0.48 0.55Interest coverage 1.00 0.83 5.88 10.59

Conn’s Inc.’s debt-to-equity ratio fell during 2011 to 2012 and 2013, but increased back to 1.20 level in 2014.

Conn’s Inc.’s debt-to-capital ratio deteriorated from 2011 to 2012 and 2013 but restored back to the 0.55 level in 2014.

Conn’s Inc.’s interest coverage ratio decreased 0.17 from 2011 to 2012, but increased significantly from 2012 to 2013 with a 5.05 increment rate. It almost doubled in 2014.

Efficiency

2011 2012 2013 20140

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Cash Turnover Inventory TurnoverAccounts Receivable Turnover Accounts Payable TurnoverCash Conversion Cycle (Days)

Conn’s Inc.’s Cash Turnover ratio increased to almost triple its original size from 2011 to 2013, with an average rate of 76.405 a year, but deteriorated from 2013 to 2014 with a rate of -17.

Conn’s Inc.’s Inventory Turnover elevated from 2011 to 2012 at a rate of 1.54 but deteriorated from 2012 to 2014 with an average rate of -1.275.

Conn’s Inc.’s Account Receivable Turnover has stayed stable without any critical differences within an average range of 2.04 to 2.20 for the past 4 years.

Conn’s Inc.’s Account Payable Turnover improved from 2011 to 2012 but deteriorated from 2012 to 2013 and stayed stable from 2013 to 2014.

Conn’s Inc.’s Cash Conversion Cycle decreased from 2011 to 2012, generating a good sign for investor but has increased sharply since 2012.

2011 2012 2013 2014

Efficiency Ratio

Cash Turnover 71.87 126.57 224.68 207.68

Inventory Turnover 5.78 7.32 6.06 4.77

Accounts Receivable Turnover 2.10 2.20 2.04 2.06

Accounts Payable Turnover 8.25 10.23 6.42 6.96

Cash Conversion Cycle (Days) 193.00 180.05 182.26 201.68

Risk Price risk – Conn’s Inc. faces a high degree of risk when dealing with the issue of significant increases in online. In

recent years, online retailers have become much more prevalent in society, as the more convenient approach to shopping, not to mention the low prices these retailers also advocate. These online low prices have negatively impacted “brick-and-mortar” retailers, as they are forced to compete with this new-age style of retail. In turn, this is negatively influencing Conn’s Inc., which is forced to decrease their prices, and therefore their margins.

Consumer credit risk – Conn’s Inc. in-house financing program is one of their strength. However, Conn’s Inc. is exposed into a higher risk of consumer credit. Furthermore, Conn’s Inc. revenue mostly comes from sales and financing and if their customers have trouble with their payments, the company’s cash flows will be in greater risk.

Inventory risk – Conn’s Inc. inventory turnover rate has decreased to 4.77 so it put the company into a greater risk as a consumer retail company. Moreover, a lower rate of inventory turnover means that Conn’s Inc. is experiencing difficulty in selling their product, thus the company will have to reduce the price in order to sell their overstock inventory.

Weather risk – Conn’s Inc. is mainly located in the South region of the U.S. which Southern U.S. region is more likely to experience natural disaster than other region of the U.S.

Regulatory risk – Conn’s Inc. is operating in America and it must obey both the local state law and federal regulations. Moreover, the law could hurt Conn’s Inc. because according to the federal consumer protection regulations, a consumer retail company cannot over-charged their customer based on their loans contract.

Foreign currency exchange risk – Conn’s Inc.’s suppliers are mostly international company outside of the U.S. which Conn’s Inc.’s payment to their supplier will be in different foreign currency than U.S Dollars. Currency exchange will negatively impact to the company’s balance sheet because of the process of exchange one currency to another.

One Month Performance