Buried within the transcript of Conn's Q4 2024 earnings call lies a revelation that seems to have slipped past the radar of most analysts. While the focus remains on the ongoing integration of W.S. Badcock and the pursuit of cost synergies, there's a subtle but compelling narrative emerging: Conn's might have inadvertently discovered a formula for thriving in a recessionary environment.

The evidence lies in the company's strategic shift towards serving credit-constrained customers. Norm Miller, Conn's CEO, has repeatedly stressed the importance of this refocused strategy, and the latest results suggest it's paying off. Despite a challenging macroeconomic climate marked by inflation and tightened lending practices, Conn's saw a 4.3% year-over-year increase in sales financed through their in-house credit option. Even more telling, lease-to-own sales, the domain of consumers with the most limited credit access, surged by 2.5%.

This isn't just a blip on the radar. Conn's credit application volume tells a powerful story. The company has been diligently refining its application process, making it easier and less impactful on credit scores. The result? A staggering 21.6% year-over-year increase in applications. This points to a substantial pool of consumers eager to access Conn's credit offerings, and crucially, it's a consumer base that other retailers are increasingly overlooking.

The narrative becomes even more intriguing when we consider Badcock's credit program. Currently, Badcock utilizes a revolving credit model – a model that, by design, often leads to higher monthly payments, restricted credit availability, and shorter repayment terms. Conn's, on the other hand, has honed its expertise in installment loans, which offer lower monthly payments, greater purchasing power, and extended repayment durations.

Here's where the potential "recession-proof" aspect comes into play. By transitioning Badcock's credit program to Conn's installment loan model, the company is essentially unlocking a significant well of pent-up consumer demand. Imagine, for instance, a customer in Florida purchasing a $1,400 item. Under Badcock's revolving credit, they'd face a monthly payment of around $110. With Conn's installment loan, that same purchase becomes significantly more manageable, with a monthly payment of approximately $56.

"Reference: Conn's Q4 2024 Earnings Call Transcript"

This difference is not trivial. In an environment where consumers are scrutinizing every dollar, the allure of lower monthly payments and enhanced purchasing power becomes a potent driver of sales. Conn's isn't just competing with other retailers, they're strategically positioning themselves as the go-to destination for a consumer segment increasingly squeezed by economic pressures.

But it goes beyond just credit. Conn's is leveraging the complementary product mix of the combined Conn's-Badcock entity. They're taking Badcock's strengths in furniture and mattresses, which carry higher margins, and integrating them into Conn's historically appliance-centric model. This explains the 480 basis point jump in retail gross margin in Q4, reaching 38.3% compared to 33.5% pre-merger. The company confidently projects further expansion, exceeding 40% in coming quarters.

Retail Gross Margin Growth

The chart below illustrates the projected growth in Conn's retail gross margin:

What we're witnessing with Conn's is more than just a merger integration; it's a calculated recalibration of their business model. They're focusing on a credit-constrained customer segment that's increasingly underserved by traditional retailers, while simultaneously leveraging a higher-margin product mix to bolster profitability.

Hypothesis:

Conn's is primed to outperform the broader retail sector in the coming quarters, potentially experiencing positive same-store sales growth even as other retailers grapple with a downturn in consumer spending.

Supporting Numbers:

21.6% increase in Conn's credit applications year-over-year: This signifies a robust pool of credit-seeking consumers.

4.3% growth in Conn's in-house financed sales: Demonstrates the appeal of Conn's credit offerings.

2.5% surge in lease-to-own sales: Highlights the strength of the most credit-constrained consumer segment.

480 basis point improvement in retail gross margin: Reflects the higher profitability of the combined product mix.

"Fun Fact: Conn's, with its roots in Texas, has a history of offering credit since the 1930s. This deep experience in serving credit-constrained consumers is arguably a unique asset in today's retail landscape."

Conn's has embarked on a journey that could reshape the landscape of recession-era retail. By understanding the needs and motivations of a consumer segment often disregarded, and by expertly leveraging credit and product mix, they're crafting a strategy that other retailers might soon be scrambling to emulate. The coming quarters will be crucial in validating this hypothesis, but the early signs are undeniably compelling.