Good morning, and thank you for holding. Welcome to Conn's, Inc. Conference Call to discuss earnings for the second quarter ended July 31, 2012. My name is Tyrone, and I'll be your conference operator today. [Operator Instructions] As a reminder, this conference call is being recorded. The company's earnings release dated September 5, 2012, distributed before the market opened this morning, and slides will be available -- referenced during today's call can be accessed in the company's Investor Relations website, ir.conns.com. I must remind you that some statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the company's present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today. Your speakers today are Theodore Wright, the company's CEO; Mike Poppe, the company's COO; Brian Taylor, the company's CFO; and David Trahan, President of the company's Retail division. I would now like to turn the conference over to Mr. Wright. Please go ahead.

Good morning, and welcome to Conn's Second Quarter Fiscal 2013 Earnings Conference Call. Joining me this morning are Mike Poppe, our Chief Operating Officer; Brian Taylor, our Chief Financial Officer; and David Trahan, President of our Retail division. I'll begin the call with an overview focused on our retail segment, Mike will then discuss our credit segment and Brian will complete our prepared comments with additional financial information and review of our capital position. Conn's is providing a valuable credit alternative to customers. The mix of credit sources by consumer -- for consumers is on Slide 2. On Slide 3, you see our same-store sales performance by product category. The trend in same-store sales growth continued in August with August same-store sales increasing approximately 12% on top of a 6% increase in the prior year. Same-store sales of furniture and mattresses increased about 33% in August on top of an increase of 59% for the categories in the prior year. In August, for back-to-school, same-store sales of home office were up 28%. Mattresses are growing as a category, and the specialty mattresses are leading growth within this category for us. At prices around or below $2,000, these products are accessible to our customer base. Appliance comparisons were reduced by declines in sales of window air-conditioning. Although not typical for most of the country, this summer was not as hot as the prior year in our larger markets. This category reduced the total same-store increase percentage by 2% and 4% in the quarter and August, respectively. Several of our Louisiana locations were closed due to Hurricane Isaac in August, and this reduced the same-store increase percentage for the month about 1%. Manufacturers' UPP programs are definitely helping our margin performance in television. In our opinion, this price discipline is not having a negative impact on our sales rates. Our ASP is among the highest in the industry, and the UPP has more effect on our performance than it may have for others. Traffic trends through August were stable despite reduced use of low promotional price points. Labor Day weekend sales were solid as well with margin and sales both increasing over the prior period. While we have struggled to execute the right mix of promotion and maintaining margin on holiday weekends, our execution improved over Labor Day. Updated guidance is for same-store sales to increase mid-single digits for the last half of this year. We're cautious on the television market in particular. Comparisons were positive in this category in August, but we'll see if this performance can be sustained. Modestly negative electronics comparisons is our assumption for the remainder of the year. Our long-term goal is for furniture and mattresses to be 30% of our total product sales. Furniture and mattresses were 21% of product sales for the quarter. Achieving this goal requires expansion of square footage for the categories from remodels, relocations and new stores; improved SKU productivity; creating higher consumer awareness of our offerings; and better sales associate product knowledge. No one action will allow us to reach our goal, and we expect it will take several years to achieve. Right now, only one store has a run rate of over 30% of sales from furniture and mattresses, our new Waco store. But many stores are solidly in the 20%s, particularly our remodeled stores. Slide 4 shows our gross margins by product category compared to last year. Improvement in gross margin percentage is mostly the result of the mix shift for furniture and mattresses and improvement in furniture sourcing, but margins improved in all major categories. On our last call, we set a goal of 35% gross margin percentage. For the quarter, we came close at 34.1%. Our average margin for July and August is right around our goal. We need to prove that we can sustain this performance throughout the year and through a full promotional calendar. Turning to Slide 5. Sales floor execution continues to improve. Sales customer satisfaction scores were 95% for the quarter in August. Productivity improved to $63,000 per sales associate in August. Turnover was 61% in the quarter compared to 108% in the prior year quarter. Much more, the turnover in the current year is at the company's direction. We're now measuring closing our conversion rates on a consistent basis and believe conversion rates can improve as our sales floor, tenure and execution improves. Store management attention and intensity is shifting to conversion. The new Waco location opened in June, continues to perform well and was in the top third of all stores in August, even as grand opening promotion waned. Overall, gross margin percentage in the store is approximately 500 basis points higher than the company average, four-wall profit margin percentages for the store among the highest in the company. The Waco location contributed to net profitability from the time it opened. Even though we're happy with the results in Waco, there are plenty of opportunities to improve, particularly in hiring, training and preparation of our sales force. The staffing and training plan for future openings is being modified to reflect the lessons learned. We expect to add 4 more stores in the current fiscal year. Two stores are expected to open late in Q3 or early Q4 with the remainder to open in the fourth quarter. For fiscal 2014, we plan to open 10 to 12 stores. All but a few of the sites for fiscal 2014 are already identified. New stores have more square footage than our average store today, and the planned store locations serve markets with higher sales potential. We believe we have the infrastructure and management resources to support this reasonable growth pace. Remodeling of existing stores continues, and 4 were completed in the second quarter. Another one was completed in August. Expected sales per square foot for the added square footage are less than our current average. The additional square footage is largely devoted to furniture with a lower-than-average sales per square foot. Given the much higher gross margins in furniture, however, the contribution to profitability is greater than the increase in sales. The remodeled stores are still outperforming our company average in sales growth by about 10% to 15%. Added footage from the remodels is not increasing our rent expense. We're simply reducing the square footage allocated to backroom or storage. Management staff doesn't increase. Other overhead also doesn't increase besides depreciation of the investment in remodeling. In about 10 locations, we're pursuing relocation to better sites as we approach the end of lease terms. Relocation sites will provide us additional square footage for furniture and mattresses. These larger footprint stores will generally have lower rent per square foot than currently typical but, depending on store square footage, could have total rent higher than typical today. The combination of remodels and store openings in fiscal 2013 should add approximately 300,000 sales square feet or 20% to our existing base. The planned store openings in fiscal 2014 and the remodels in the same period should add approximately an additional 30%. At the end of fiscal 2014, sales square footage should be about 50% higher than at the beginning of fiscal 2013. Sales square footage growth will be achieved while only growing units by 24%. Looking back to the beginning of fiscal 2012 when we had 76 stores, the total units will only increase by a maximum of 5. Over several years, we should be able to increase sales square footage significantly more rapidly than unit growth. Unit growth with the addition of management in unproven locations is riskier than growth in existing locations. Because of this, we believe our relatively rapid growth in sales square footage does not create the same risk as a similarly rapid growth in unit count. As you may have noted in the press release, the company relocated its primarily corporate offices to the Woodlands, Texas. We still have a sizable presence in Beaumont, and many functions remain there. The relocation was intended to and is making Conn's for competitive for talent. Without question, we're already seeing the benefits of this move. Hurricane Isaac had a modest impact on several of our Louisiana locations. We're thankful the impact to us and our customers was not worse, as we certainly have experience with the potentially devastating impact of a hurricane. Our associates and service providers responded well, and we appreciate the efforts made to minimize the impact of the storm. Our previously stated goal is to deliver returns on equity of 17%. Our updated guidance for this year implies a return on equity of about 13%. Our retail segment is delivering its share of the necessary performance to achieve our goal. Our credit segment needs to continue its current improvement trend for us to meet our goals, and Mike will provide additional comments on this topic. Now, I'll turn the call over to Mike.

Thank you, Theo. Credit portfolio quality continues to improve, evidenced by the continued improvement in the weighted average credit score of the portfolio. As shown on Slide 6 and 7, you can see the weighted average credit score increased to 602 as of July 31 compared to 594 last year and 574 4 years ago. A key contributor to this improvement has been that tightened underwriting requirements implemented over the past few years with the last increase of the minimum credit score taking place in the fourth quarter last year. See Slide 8. Through the first 6 months of last fiscal year, 5% of our originations had a credit score below 550 compared to 2% so far this year. And this year's customers with credit scores below 550 are prior credit customers with proven payment histories at Conn's. Another contributor to the improved portfolio quality is the benefit of the changes to our charge-off and re-aging policies, which have reduced the age of receivables in the portfolio and the percent of balances in the portfolio that have ever been re-aged. As presented on Slide 9, our more restrictive re-aging criteria have resulted in a reduction in the percentage of balances re-aged during the quarter from 7.7% to 4.4%. This is the seventh consecutive quarter of year-over-year reductions in re-aging. As a result, the percent of the portfolio re-aged, shown on Slide 10, has declined for 6 consecutive quarters. With the older, more highly re-aged accounts being eliminated, the percent of the portfolio that was originated more than 36 months ago has been cut by a little more than half and reduced to 1.4% of all balances since July of last year. And the percent of the portfolio originated more than 48 months ago has also been cut by a little more than half and dropped to 0.3% over the same time period. Looking at the long-term delinquency trend on Slide 11, despite the reduction in re-aging, we have seen a declining trend over the past 3 years for the percent of the portfolio that is in the earlier stages of delinquency: 31 to 60, 61 to 90 and 91 to 120 days past due. Additionally, the 60-plus day delinquency rate as of July 31 has been reduced by 110 basis points since January 31 compared to a 90-basis-point reduction in the same period last year. The improving portfolio performance trends have continued since the end of the second quarter. During the month of August, the 60-plus day delinquency rate was reduced 10 basis points to 7.4% compared to an 80-basis-point increase last August to 6.9%. This brings the 7-month reduction in the 60-plus day delinquency rate to 120 basis points this year compared to a reduction of only 10 basis points for the same period last year. Historically, delinquency has increased during the month of August. Additionally, in August, we saw strong payment rate performance with the payment rate exceeding July's rate for the first time since 2007. Also, and this is not normally the case, it was the highest payment rate achieved since the month of March, which benefited from tax season collections. For the quarter, the payment rate declined sequentially, which is typical, given the benefit of the tax season collections we always receive in the first quarter. On a year-over-year basis, the payment rate was down 22 basis points, due largely to the fact that the portfolio is growing. The payment rate is lower early in the life of an account and increases over time as the balance declines, given that our contracts have a fixed monthly payment. As we continue to flush out the older, more highly re-aged accounts, the total delinquency and charge-off performance will follow. This is evidenced by the change in the percent of accounts 31 to 120 days past due, which is 70 basis points lower in August than in the prior year and is at its lowest point in the last 5 years. Conversely, the percent of accounts over 120 days past due is at its 5-year high and is up 80 basis points compared to last August. As this bubble in the delinquency works its way out of the portfolio, the later-stage delinquency will follow the same trend we are seeing in early-stage delinquency. Accordingly, we expect 60-plus day delinquency to decline sequentially and year-over-year during the third and fourth quarters this year. As expected, the charge-off trends improved at the end of the second quarter with the July and preliminary August charge-off rates dropping below what we experienced during the first 6 months of the year. We expect the charge-off rate to decline sequentially during the third and fourth quarters of this year. And next year, based on our current underwriting and collection practices, we expect the net charge-off rate to run between 5% and 6%. On top of the improvements in the underlying credit quality of the receivables, we have been improving our servicing performance through enhancements to our collection strategies to more precisely identify high-risk accounts and the appropriate strategies to apply to those accounts, as well as increasing our staffing levels to ensure adequate resources are available to execute the plan. A portion of the increase in staffing has replaced some of the positions previously eliminated as we concluded that we were too lean to properly execute our strategies and achieve the expected performance. Even as we have added headcount, we have continued to see collector productivity per hour increase and credit SG&A decrease as a percent of credit segment revenues. In underwriting, while we have made no changes to our approval standards this year, the increased offering of short-term, no-interest financing options is further shortening the effective contract terms on top of the shorter total contract terms we are requiring. We estimate that the effective weighted average origination term is approximately 26 to 27 months for recent originations based on our historical experience with customers paying their accounts within the no-interest terms compared to 29 to 30 months a year ago. The expected benefit of the increased use of no-interest programs on the effective term is approximately 1 additional month of term reduction on top of the benefit of the shorter required payment terms implemented. In total, we have shortened the weighted average effective origination term by approximately 5 months or 17% with the changes we have made the past 2 years. This should result in a higher payment rate over time, improving overall portfolio performance and requiring less capital to support the credit operation. Also, this will allow us to better allocate capital and invest a greater proportion in the higher-return retail business. While it has taken longer than originally expected to deliver the improved portfolio performance, the recent delinquency and charge-off results prove we are moving closer to achieving our expectations. After focusing on underwriting policies last year to improve the quality of credit being originated and then revising our re-age and charge-off policies to eliminate low-quality receivables from the portfolio more quickly, we have turned our attention to the servicing operation. We made several changes this year that disrupted our collection performance and slowed our achievement of the desired portfolio performance. Recent results have confirmed the changes to be the right decisions, and we are focusing on improving daily execution as our collection team becomes more comfortable with the changes, which include the following: consolidating our inbound customer service teams in the San Antonio call center and moving to a blended environment where all of the agents work outbound and inbound calls simultaneously; we have revised our outbound calling strategies to more effectively allocate our resources to higher-risk accounts, allowing lower risk accounts to self-cure; we are using third party collection agencies to provide support to allow us to flex our staffing quickly based on changing resource needs; and we are hiring additional staff to execute our new calling strategy and refill some of the previously eliminated positions. With the improved credit portfolio quality, fewer changes being made to the business and attention turned to focusing on continually improving execution, we believe we are on track to deliver improved and consistent profit contribution from the credit operation. Now, I'll turn the call over to Brian Taylor.

Thank you, Mike. Good morning, everyone. We delivered record second quarter results, driven by the significant same-store revenue growth and margin expansion across all major product categories. Net income, excluding charges, was $11.8 million or $0.36 per diluted share in the current quarter, double the level reported on an adjusted basis a year ago. The year-over-year increase in profitability was attributable to our retail segment. Revenues for this segment were $171.9 million, rising 12.8% over the prior year quarter. On a same-store basis, revenues grew 21.5%. The effect of this and the mid-June opening of our Waco, Texas store was partially offset by previous store closures. Retail gross margin was 34.1%, 530 basis points above the prior year quarter. As shown on Slide 12, retail segment SG&A expense, as a percentage of sales, declined 50 basis points to 27.1% in the quarter from 27.6% last year. The impact of growth in sales-related compensation and advertising expenses was more than offset by a reduction in occupancy costs due to store closures and the leveraging effect of higher sales volumes. SG&A, as a percent of gross profit, was 78.5% in the current period, down 14.8 percentage points from last year. Operating income of our retail operations on an adjusted basis was $12.9 million, a $9.8 million increase over last year. Operating income for the credit segment declined $2.9 million from the prior year quarter. The impact of higher interest and fee income and reduced servicing costs was more than offset by an increase in provision for bad debts. Credit segment interest income rose modestly over last year. The impact of growth in the average portfolio balance was largely offset by a decline in portfolio yield. The portfolio income and fee yield was 18.4% this quarter, up 40 basis points sequentially but down 90 basis points from the prior year. The year-over-year decline is due to a higher proportion of short-term promotional receivables outstanding relative to the total portfolio balance and increased provision for uncollectible interest. Credit segment SG&A, or servicing costs, declined $1.3 million from the prior year quarter to $12.9 million. Approximately 1/2 of this decline was personnel related. As a percentage of revenues, servicing costs were 36.5% this quarter, down 440 basis points from last year. We expect to see a modest sequential quarter increase in servicing costs. The provision for bad debts increased $5.1 million over the prior year period. Approximately 1/2 of the increase was driven by a 46% quarter-to-quarter increase in originations under Conn's credit portfolio. This growth in receivable originations was driven by the sales growth, not a change in our underwriting standards. While we saw improvement through the current quarter in charge-off and other portfolio metrics, delays in reducing the delinquency and, thus, charge-offs drove the balance of the increase in provision for bad debt. Re-age and charge-off policy changes implemented last year have accelerated the charge-off of low-performing credit accounts. As shown on Slide 10, the balance of the portfolio re-aged dropped to 10.7% at quarter end compared to 17.2% a year ago. As a result, we have seen an increase in the percent of balances 60-plus days past due rising from 6.1% of total receivables at July 31, 2011, to 7.5% of total receivables at the end of the quarter, though not to the extent of the decline in re-aging. The anticipated elevation in account charge-offs due to policy changes peaked during the second quarter. We expect the charge-off rate, as a percentage of the portfolio, to decline in the third and fourth quarters of fiscal 2013, and preliminary charge-off statistics for August indicate the expected trend is materializing. With the changes implemented, improvements seen through the quarter and into August, the provision for bad debts as a percentage of the overall credit portfolio should decline over coming quarters. On a full year basis, we expect the provision for bad debts to range between 5.5% and 6.5% of the average portfolio balance, consistent with our previous guidance. To assist in understanding the earnings sensitivity related to our expectations for portfolio performance in fiscal 2014, if the provision were based on the midpoint of the 5% to 6% charge-off rate Mike discussed, it would have resulted in an approximate $0.08 benefit to EPS for the quarter. Interest expense declined $2.1 million from the prior year quarter, reflecting our debt refinancing in July 2011 and a reduction in our outstanding debt. Sequentially, interest expense rose $1.1 million principally -- due principally to the April 30 issuance of the ABS notes, which carry an effective interest rate of 8.2%. As the ABS notes amortize over the next 3 quarters, we expect to see a gradual reduction in our overall effective interest rate. Turning to the balance sheet. Inventory turns were 6.5 for the current period, flat sequentially and well above the 4.9 level of last year. In July 31, 2012, approximately 93% of our $70 million in inventory was financed to us at outstanding accounts payable, thus requiring very little of our capital to support inventory. Turning to Slide 13. Our customer receivable portfolio balance equaled $662 million at July 31, up $18 million from year end. Outstanding debt at quarter end equaled $315 million or 48% of the customer receivable portfolio balance. This compares to debt of $322 million or 50% of customer receivable balance at January 31, 2012. The improved operating performance during the first half of fiscal 2013 has allowed us to internally finance the portfolio growth. In addition, it contributed to the improvement and the debt-to-receivable ratio and the debt-to-equity ratio, which stood at 0.8x at July 31, 2012, compared to 0.9x at year end. As of July 31, we had immediately available borrowing capacity of $136 million with an additional $79 million that could become available with growth in eligible receivables and inventory, giving us total borrowing capacity of approximately $215 million at quarter end. Annualized return on stockholders' equity was 12.4% for the second quarter of 2013 compared to our long-term goal of high teens return on equity. Given our current capital position and growth plans for next year, we do not believe that additional capital will be required to fund the business for at least the next 12 months. We will, however, continue to evaluate financing alternatives to support our longer-term needs. Turning to Slide 14. Based on changes in our full year expectations for same-store sales and retail gross margin, we have increased earnings guidance by $0.10 for fiscal 2013 to $1.40 to $1.50 per share on an adjusted basis. Much of this analysis and more will be available in our Form 10-Q to be filed with the SEC. That completes our prepared remarks. Operator, please begin the question-and-answer portion of our call.

[Operator Instructions] First question is from Brad Thomas of KeyBanc Capital.

I wanted just to first ask about your expectations for same-store sales in the back half of the year. I think the new guidance leaves a pretty wide range by our estimates. Just simple rounding would get us a range of about 0 to 10% over the back half. You start to get up against more difficult comparisons in the coming months. Could you just talk a little bit about some of the puts and the takes and how you're thinking about comps in 3Q and 4Q?

Yes, this is Theo. I'll answer that question. I think, as we said in our comments, we are cautious, particularly about electronics, television sales, and have a view that those are likely to be modestly negative through the balance of the year. That wasn't the case in August. And I think more than any of our other categories, the sales right there is volatile and can depend about vendor -- can depend on vendor promotion and support and other factors. So I think we remain cautious there, but certainly, the recent trend is better than we've seen. On appliances, pretty -- we've been pretty steady there, expecting that to be, relatively speaking, flat. Furniture and mattresses, I think we're extremely bullish and confident that we'll generate positive same-store sales growth there. I think the question is the magnitude. It's still a new business for us, and we don't have the ability to forecast with the same accuracy that we do in our other categories. So when you take all of those things into consideration, I think our view is, I think, relatively cautious. We're not sure about economic trends, and our focus is really on continuing to execute our strategies, particularly in furniture and mattresses.

Great. And if I could just add a follow-up on the retail gross margin, another very strong quarter with not only a mix benefit but improvement within the categories. It sounds like you're still in the early innings of a number of things that could drive that higher. When you step back and look at retail gross margins, how much more runway do you think you have? And is there a longer-term target that you can maybe speak to?

The runway or the opportunity is really going to be driven by furniture and mattresses. If you look at our stores that are getting closer to or are at our goal for 30% of sales from furniture and mattresses, those stores' gross margins are considerably higher than our company average. Our Waco store is knocking on the door of 40% gross margins. So the longer-term opportunity is really tied to achievement of our goal of 30% of sales from furniture and mattresses. And if we can achieve that goal, then we still think there's runway in overall gross margins. We don't see a lot of runway left in television, appliances, home office. We may be able to get a little more, but the real opportunity for us is in furniture and mattresses.

Our next question is from Rick Nelson of Stephens.

I'd like to ask you, Theo, about the store growth. Last quarter, you were guiding to 5 to 7 new units, and the new guidance today is 5 stores. Curious what has changed there in the markets that you're looking to go to, if you could tell us where those are.

What's changed in our guidance of 5 to 7 stores is essentially construction scheduling for a couple of locations. Those are locations that are still on the pipeline, but instead of being completed towards the end of this fiscal year, they're going to be completed in the early part of next fiscal year. So it's really just construction scheduling, not any change in the markets that we're pursuing or our thinking about store growth generally. The -- in response to your second question, the markets that we're pursuing for fiscal 2013 and fiscal 2014 will be in our existing states, Texas, Louisiana, Oklahoma, as well as New Mexico and Arizona. And a side note on New Mexico and Arizona, those are states that do allow us the benefit of the ability to charge a higher rate for our consumer financing.

Is my understanding correct that those rates are 30% and 35% compared to 21% or 22% in your existing markets?

We could charge 30% or 35%. I don't believe that's our intention. We're still finalizing our approach to pricing, but we wouldn't expect to charge that much, but we do plan to have a higher interest rate in those markets than we have today. Two benefits of that: one would be just the higher interest earnings; the second thing is at a higher rate, as we consider that in our underwriting model, we could also underwrite a larger customer base than we underwrite today. So we're still finalizing our plans there, but we will definitely charge more, and we think we have more opportunity to do business with a higher interest rate.

Okay. And are there opportunities within your existing 3 states to potentially go after higher rates there?

There are opportunities, and we're evaluating those and have taken a look at a number of different opportunities. But at the moment, we don't have anything planned to execute in those states.

To follow up on the comps, too, you -- we've got the August compare. If you could kind of tell us what the September and the October compares look like. I believe that you had a bit tougher.

Certainly when you think about that we did an almost 19% comp in the third quarter last year, the comps accelerated significantly over the 6% in August to -- and we're fairly consistent in September and October last year.

And just one comment on that. And if you look at the comparisons to just a year ago, the comment on September and October is correct. But if you look at a multiple year trend and our particularly weak performance in the third quarter 2 years in a row, the comparisons in September and October really aren't more difficult. And if you look at our trending seasonally adjusted, I think that supports the conclusion that those -- and we look at that over a multiple-year period. When you look at our seasonal trend, really September and October aren't particularly comparisons, despite the big number for same-store sales last year because we were really bad 2 years in a row in those months.

So looking at a 2- or 3-year stack is probably the better way of analyzing things?

It is.

If I could ask one final question on the furniture category. The sales productivity, I realize you've seen some big growth there. If you could talk about sales per square foot in that furniture and mattress category and maybe what your goals are for that business.

Yes. On the sales per square foot, it's really hard. We've struggled to set goals because our footprints are so different between locations. And as the square footage increases, until we improve our selection, those added SKUs aren't necessarily as productive as they should be. So internally, we're really focused on the percentage of sales from furniture and mattresses, and that's what we're driving our people to and measuring and not sales per square foot.

Our next question is from Peter Keith of Piper Jaffray.

With the Waco store, some impressive numbers kind of out of the gate, running very high sales productivity, and then I think it was 500 basis points at gross margin versus the chain average. Can we think about Waco as being kind of a proxy for how new stores could be opening up going forward here? Or is there something with Waco that might be an anomaly?

Our Waco location is somewhat larger than the average that we expect to open. So I think the percentage of sales from furniture in Waco may be modestly higher. Pretty similar, but maybe modestly higher. Conversely, the Waco location serves one of the smallest market areas of any store that we plan to open over the next 2 years, so I think that should be more than offset by the additional population and market potential. So I think on balance, Waco is a pretty good indication of what we expect.

Okay. And same on the gross margin trend as well?

That's correct. And it's not -- we're not charging a different price for appliances and electronics in that location. It's really just mix. It's furniture and mattresses that are driving the gross margin performance there.

Okay. And it looks like your ad spend is running up. I guess, by my calculation, it was up over 30%. Could you just talk a little bit about the strategy there? Is that something you feel like you're getting a nice return on? And I guess, would you continue to sort of fuel the fire as you're driving sales here?

We definitely think we're getting a return on that. As I've commented, we've maintained traffic fairly stable compared to a year ago, despite being much less price promotional in our advertising. We don't have the traffic-driving-type, low-price-point product that we used to have, so I think we're definitely getting a return. And the other comment is when you look at the mix of business and the much higher gross margins on the furniture piece of our business, that higher advertising spend definitely makes some sense. As we get into the fourth quarter and our sales floor continues to improve and we execute on some enhancements to our advertising, media allocation that we've been working on and commented on in our last conference call, I think in the fourth quarter, we may be somewhat more aggressive in ad spend but not in a material way. I'd just say we're going to lean to be more aggressive in the fourth quarter. But given the mix and the gross margins, we think we're getting a return on that spend.

Okay, that's great to hear. One last question for me. So the Conn's credit has really gapped up quite significantly as a percent of the payment options. Could you talk a little bit on what's driving that? Is that something we could expect to continue? Or was there something that was different with Q2 that won’t continue?

I think that what you see in Q2 is what we would expect. I don't think we would expect it to go down significantly or up significantly. In the fourth quarter, right around Christmas holidays, with a little higher mix of electronics, it tends to go down modestly. Our penetration on financing goes down modestly. What's driving that is really average selling price of the products. A year ago and looking back even further, we were promoting low-priced, traffic-driving-type products. We had a different product mix, and those $50, $100, $200, really even up to $500, those type ticket sizes tend to have a much higher percentage of sales either from a credit card or cash payment by the customers. So what's really driving it is mix. Our underwriting standards have been remarkably stable over the last year. It's nothing to do with underwriting. It's all about ticket size and the mix of products that we're selling.

Our next question is from Dan Binder of Jefferies.

So I had a few questions. If I look back at your comps over the last year or so, you've had a benefit of, through re-merchandising efforts, of average price points coming up and so average ticket coming up combined with better credit penetration. If we're now stabilizing on the credit penetration and we're lapping the average price points, it would seem like the increase in comp would have to come from units, which, by and large, the last few quarters have been more negative in some of these categories as you've gone through some re-merchandising. So my question is as you look out to the back half of the year, would you expect the vast majority of these categories that have been comping negative on units to turn positive?

As we go into the back half of the year, the trend will be to a more positive comp in units as we comp a consistent strategy. But our strategy that drove ASP really was implemented over a period of time and at different times, depending on the category. So if you look at appliances, for example, we didn't really fully execute our current strategy until the first quarter of this year, where home office was earlier. And so when you look at the comps over the next several quarters, they will continue to benefit, although at a reducing rate, from our changes in strategy because we didn't execute -- we didn't just flip a switch as of a day and have all of these changes implemented in all of our categories. It took a period of time, and it really wasn't completed until the first quarter of this year. So I think we'll still benefit, just not at the same rate, and units should comp more positive. As we refine our promotional strategies, I think we'll be more positive. We had an excellent Labor Day weekend with a strong performance and terrific margins as well, good traffic. So I think that the comp trend in units should be there for us.

Okay. And then you mentioned looking at 2- and 3-year stocks. So if we look at August, it looks like the 2-year stock is 18. You're facing a 19 compare for Q3 of last year. So to get comfortable with what that looks like on a 3-year, I was wondering if you had the monthly comps for -- from 2 years ago for August, September, October?

Yes. For August of 2010, we saw it down 8.7%. September, we were up 2%. And then October, it was down 21%.

That was fiscal 2010. And one note I'd make on the positive 2% in September is that was benefited because we had a huge negative comp a year before because of the hurricane. It closed a lot of our stores when Ike rolled through Houston and the Gulf Coast. So that positive 2% wasn't really a positive 2%. It was more similar when you take the effect of what happened in fiscal '09. It was much more similar to the October down 20%. It was probably down high teens.

Got you, okay. What was the -- you had pre-released your gross margin with your sales release. You reported gross margin for the quarter was somewhat better. I was just curious what the primary difference was with the pre-release versus the actual.

Really, just finalizing the estimates with -- as we pre-released, we’re early in the process of completing the financial statement, so it's really just reflecting and finalizing estimates related to reserves for obsolescence, et cetera.

Vendor support and all those kind of moving pieces.

Yes. No significant issues, really.

And then on the credit business, I saw the charge-offs. The rate in the quarter was kind of leveling off, actually down slightly from last quarter. But delinquencies picked up a little bit. And I know you said August, it came down 10 basis points. With the sequential increase in delinquencies from Q1, why wouldn't we see the charge-off rate go up a little bit more before it comes back down? I just sort of think about today's delinquencies as tomorrow's charge-offs. I realize you have a lot of policy changes, so I was just trying to sort through that.

Two things on that, Dan. Number one, when you think about the seasonality of delinquency for us, Q1 is always the low point to the year. So it will always rise going into second quarter. And then, the reason why we don't see charge-offs continuing to go up is the reason charge-offs have been this high is because of the policy changes made last year, and we have a lot of those older highly re-aged accounts that have been flowing to charge-offs here in the first and second quarter. And as that bubble of accounts diminishes, we should start returning to a more expected charge-off performance.

So as you look out to the back half of the year, very rough range, kind of where do you expect the 60-day delinquency and charge-off rate to trend towards by the end of the year?

We are -- from a delinquency standpoint, we said that we expect sequential and year-over-year declines in the delinquency rate. We haven't given specific charge-off guidance for this year, but we are looking to next year to be between 5% and 6%.

5% to 6%. And then Q4, are those -- it sounds like Q4, those rates will be sequentially better than Q3? Is that fair?

Charge-off, yes.

And delinquencies as well?

Yes.

Okay. And then finally, on the credit portfolio growth, do you have a number or percentage in mind for what that should look like by year end?

No, I think the place where I’d guide you or as you think about it is as you think about where sales are going, traditionally, the portfolio balance lands in the, call it, 90% to 95% of LTM net sales. So as you think about where you're projecting sales, the portfolio should follow that up.

Our next question is from Scott Tilghman of Caris & Company.

First off, I just wanted to check on sort of the development timeline for next year, the 10 to 12 stores. Should we think about that as being fairly evenly distributed over the first 3 quarters? Or is that going to be a little bit more front-end weighted given the couple of stores that fell into next year from this year?

It will be somewhat front-end weighted.

Okay. The other thing I wanted to touch on is gross margin, following up on Brad's questions. You have your goals out there, but obviously, there's some seasonality that's really tied to mix. Do you think you can hit sort of that 35% mark quarter-by-quarter? Or is that sort of a full year number, recognizing that there is going to be some seasonality around it?

The goal we expressed was a full year number, definitely, and there is seasonality in the fourth quarter. We're going to have a higher share of sales from electronics.

Okay, so that's really sort of a Q1 through 3 type target that averages out against the fourth quarter seasonality on electronics.

Yes.

Okay. Then the last thing I just wanted to touch on is you've been running with a relatively tight cash balances as it sits on your balance sheet, recognizing that you have a lot of cash inflows at any given point in time with the credit portfolio. But as you think about managing the capital structure of the business, are you comfortable running here in the low to mid-single-digit millions of cash? Or would you like to sit on a little bit more, not knowing what the economy holds over the next 12 to 18 months?

Yes. Really, the cash is immediately available through our existing credit facilities, and we're just trying to manage to minimize interest charges. We can certainly carry more cash, but that wouldn't change the amount of capital that we have readily available, and we're just seeking to minimize the interest charges.

Okay. I just wanted to make sure that, that was the case. Sometimes, optics can be misleading when you see a $5 million or $6 million cash balance, but thanks for the color.

Yes, we're not much into window dressing around here, so we’re not just going to just show a higher cash balance to show that. I think what's important is what capital we have immediately available, and I think we're in good shape there.

Our next question is from David Magee of SunTrust Robinson.

You may have just answered this, but with the timing of the store openings next year, the slightly greater number of stores that I had in my model and the remodels, it looks like you said 20% square footage growth for next year. Well, first of all, I want to confirm that. Is that what you said earlier?

I think we said 20% this year and 30% next year.

And with that, I would assume you've got the financing for the receivables that you'll incur with those new stores. You feel pretty comfortable about that?

Yes, we do. There are 2 reasons for that. One, the amount of capital that we have immediately available under the facilities that are here today. The other reason is, as Mike talked about at some length in his comments, that we've shortened the terms of our financing, and that should flow through over a period of time, and we should be able to support a higher sales rate with the same portfolio balance. So you add those 2 things together, and I think we're pretty comfortable. The other thing that I would add is that we did reenter the ABS market this past year. It was somewhat more expensive financing, but we believe that, that market is available to us as well. So we think that we're in a good position in terms of the capital necessary to support our growth plan.

Secondly, with the sort of sales numbers you're putting up and the anticipated acceleration of square footage, are you seeing opportunities for better buying terms perhaps in the furniture and mattress side of the business right now, just from being a bigger buyer in total of those products?

Yes, absolutely. We're seeing that in furniture and mattresses, but I wouldn't limit it there because, given the ASP that we're delivering to our vendors in all categories, we're delivering to them profitability that's not typical. So it isn't just the volume. It's the quality of the volume that we're delivering at higher ASPs. So we definitely are feeling the benefits of that, both in price and financing terms from our vendors, and we think we've earned the right to ask for more from them.

And lastly, with regard to the re-aging coming down so much, it seems that in the past, there's been a positive benefit with regard to customer relationships with re-aging. And as you become stricter with that policy, has there been any negative consequences of doing that with regards to relationships?

We haven't seen significant consequences, Dave. I mean, we still offer re-aging to customers that show a willingness and ability. It's just when you get to the point where it has been what we would consider excessively re-aged, it's time to make a decision on whether -- with that customer whether they can continue to pay their account or not. But the vast majority of customers are still getting the assistance they need.

Our next question is from Jordon Hymowitz of Philadelphia Financial.

Question, the rented -- RAC Acceptance financing were down from 4.3% to 3.2%. Was there any change in policy there? Or is there just -- more was done in-house? Or what caused that?

There was no change in policy, certainly not any that we're aware of. I think it may be a reflection of, to some extent, the higher ASPs and the issues that, that creates in terms of a payment amount with RAC Acceptance. But we didn't really see any change in policy or really any change in quality of execution. So I don't think we have a clear-cut reason for that decline.

So there was no timing of underwriting standards or therefore there were no decision by you to do less with them?

No, there really wasn't, Jordon.

We have question from Ian Ellis of MicroCapital.

A couple of areas for questions, if I may. The first is on the promotional financing. In terms of numbers, what proportion of originations is that now? And you got enough experience of it to be able to predict how much is prepaid within the 0% period. And just really following on from that, kind of to what extent does this expand your addressable market and, perhaps most importantly, improve your velocity in return on capital? So there's that area. And then the other area is on the sales side. You mentioned working on conversion rates. You mentioned lessons from your first new store opening in a new market for some time. What are the things, which -- what are the areas for further improvement on that new store? And what are the things which you're looking at generally to improve conversion ratio and the lessons which you've learned from Waco to implement into new -- additional new markets.

Okay. We'll start with the question on the financing side and what percentage are we underwriting that's promotional credit.

So in the second quarter, about 35% of our sales were on short-term promotional credit on Conn's, which is primarily a 12-month cash option. We have seen historically that about 50% of people that enter into a 12-month no-interest financing program meet the terms of that contract. So where they are -- probably have a original standard term of 32 months, for a larger balance, we'll get 1/2 of that. We’ll be paid within 12 months. And as stated on the call, that's a benefit as we have increased that level from, call it, mid -- low mid-teens last year to high 20s to 30% of our sales this year, it's an additional month reduction in the effective term. It should reduce the capital needs somewhere in the 3% to 5% range. And in total, it's a 2- to 3-month reduction compared to not doing the cash option financing.

And in terms of addressable market, I'm not sure that it dramatically changes the market that we can address in the sense that our underwriting standards for these promotional offerings are consistent with our other underwriting standards. We're not using a different underwriting standard based on the shorter term. It's the same. So I don't think it's changing our addressable market. It is one of several things we're doing to improve the velocity of our portfolio. And given the dramatically different returns on capital between our retail segment and our credit segment, we think that this should allow us to, over time, increase our overall returns on capital meaningfully. Turning to the conversion rates from the new opening, I would say, really, the answers to those questions are the same because the opportunity with our new opening in Waco was to improve the conversion rates. We did a great job of driving traffic. We didn't convert as much of that traffic as we should have. And the opportunities are really improvement in our hiring process and, frankly, improvement in our process of evaluating the customers -- I'm sorry, evaluating the sales associates once they've hired them and make intelligent decisions and make those decisions more quickly. For new stores, there's lots of opportunity for us to do a better job of transferring in from our existing locations, and we're working on a consistent program there to go ahead and make more of an investment in transferring in tenured, proven people. We think we'll see the benefit of that. We're also making some modifications to our management staffing, at least temporarily in the new locations to ensure we have a higher ratio of management support to sales associate staffing so that those new sales associates can get the one-on-one coaching and counseling they need. Those are just some of the things. I don't want to go into too much detail here and bore you, but we do have opportunities generally to improve the performance. And these opportunities that we're executing or will execute in the new stores, they're applicable in our underperforming stores with closing rates that are well below our company average. We can execute the same strategies in those stores and, we think, meaningfully improve our conversion rates.

Great. That's helpful. And then just a follow-up question on expansion in general. I appreciate the detail you provide into next year's plans, but looking beyond next year into the following fiscal year, would you anticipate filling in, in existing territories in the states you add next year, or would we -- should we be looking at incremental states for the following fiscal?

Very likely incremental states. We're going to still look to fill in where we have unexploited opportunities. But to achieve our longer-term growth rates, we would anticipate going to additional states in fiscal 2015.

This ends the Q&A portion of today's conference. I'd like to turn the call over to management for any closing remarks.

Thank you for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.