Theo Wright - Chief Executive Officer Mike Poppe - Chief Operating Officer David Trahan - President, Retail Mark Haley - Interim CFO

Peter Keith - Piper Jaffray Brad Thomas - KeyBanc Capital Rick Nelson - Stephens Scott Tilghman - B. Riley Ben Clifford - Nomura Securities

Good morning and thank you for holding. Welcome to the Conns Inc. Conference Call to discuss earnings for the quarter ended April 30, 2015. My name is Marcus, and I'll be your operator today. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in the question-and-answer session. As a reminder, this conference call is being recorded. The company's earnings release dated June 2, 2015 distributed before the market opened this morning and slides that will be referenced during today's conference call can be accessed via the company's Investor Relations website at ir.conns.com. I’ll remind you that some of the 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 Theo Wright, the company’s CEO; Mike Poppe, the company's COO; David Trahan, the company’s President of Retail; and Mark Haley, the company's Interim CFO. I would now like to turn the conference over to Mr. Wright. Please go ahead, sir.

Good morning. And welcome to Conn’s First Quarter of Fiscal 2016 Earnings Conference Call. I'll begin the call with an overview and then Mike Poppe will discuss the Credit segment. Mark Haley will complete prepared comments with additional comments on results and our balance sheet. Starting with current retail trends, May same-store sales were up approximately 4%. We’ll provide final May sales reporting on June 4th. Inventory levels and availability were better in May. Availability was near normal or normal in all categories by the later part of month. Retail execution in May improved as well. Traffic was stronger over the holiday weekend than in the prior year. Our marketing team executed the better plan to drive traffic than in the prior year Memorial Day weekend. Sales and distribution themes were able to convert the traffic to sales at the higher rate. As we said on our last conference call, comparisons will be less challenging in Q2 and for the remainder of the year. Television sales trends have been consistently good during promotional periods and have improved over the last several months. April and May Television sales were both positive, with May same-store sales of TVs up about 5%. For May, 70% of our television sales were UHD or 4K televisions. When customers have a need or desire for a new television the value of the product is compelling. The hope for replacement cycle may have arrived, but concerns remain about the category given the volatility and performance, and the critical importance of vendor promotions which we don't control. We decided last quarter as a result of ongoing evaluation of Credit standards to stop selling gaming hardware, cameras and certain tablets. Exiting of these categories will be fully complete this quarter and meaningfully impacted revenues in May for Electronics and Home Office. Overall, Electronics same-store sales for May were down about 3% and Home Office sales were down 12%. Overall, same-store sales excluding the exited categories would have been about 6.5% for May. Appliance same-store sales increased approximately 11% in May. Appliance inventory availability improved and promotions from key vendors were strong for the Memorial Day holiday period. Since our primary Appliance suppliers are LG and Samsung, port issues had more of an impact on Conns than some competitors you have more share with the domestic suppliers. Conns is not as likely some of our competitors to benefit from the strong home building or home remodeling cycle, our core customers are less likely to more affluent groups to purchase new homes or complete major remodels and we have minimal sales to home builders. It’s hard to determine if lower oil prices are impacting sales and collections performance significantly. Houston sales are outperforming than other mature markets. Stores in oil and gas producing areas like Laredo, Odessa and Lubbock are showing more signs of slowing sales, but evaluation is still complicated by the effective grand opening period. However, the expectation that stores in oil producing markets will be reduced by sustained lower oil prices is being realized to at least some extent. Lower gas prices are benefiting the cost of living in all markets year-over-year, but the more recent trend is up. Like many other observers, we haven't seen as much benefit to consumer demand from lower gas prices as we originally expected. Turning to Retail operations in the first quarter of fiscal 2016, on slide two we show gross -- product gross margins by product category for the first quarter. Total Retail gross margin percentage for the quarter was 41.3%, slightly above our guidance of 40% to 41% and similar to the performance a year ago. Leverage of warehousing costs was down year-over-year, but we are improving sequentially. No warehouses are opening this year. All store opening will improve leverage of warehouse cost over the course of the year. With improving inventory availability continuation of positive same-store sales, which is consistent with our guidance would also improve leverage. Over the last several years we have work with vendors to make vendor programs more consistent and reduce quarterly volatility in gross margins, that process is finished and gross margins in the first quarter of 2016 were not as affected by vendor programs as in the first quarter of the prior year and earlier years. Positive trends in sales of repair service agreements continued and with stable portfolio performance and increasing RSA sales, we began to receive retrospective commissions again in the quarter. Our gross margin goal is 42% and confidence is increasing that this goal is achievable with decreasing share of revenues from Electronics and Home Office, increasing sales of furniture and mattresses, improving warehouse utilization and better material handling with the reduction in related scrap of discounted sales of products. On slide three, you can see a four-year trend in furniture and mattress sales, with inventory returning to normal, furniture’s same-store sales in May were up about 9%. For new store sales of furniture and mattresses are about 40% of the total in the quarter, completion of our relocation and remodeling program, along with store closures and new store openings should increase the share of sales from these categories. We are currently in process for 10 relocations or expansions that will increase square footage. In addition, expansion or relocation opportunities are being pursued for another 11 locations. The company's longer term goal is 45% of sales from the furniture and mattress categories. Despite issues at the port that depressed furniture availability, furniture and mattress sales were 33% of total product sales. 18 stores and five regions were at or near the goal of 45%. The port issues brought to light inventory availability problems that have been ongoing and our correctable. Our sales process is not designed to order product, so inventory shortages have an immediate impact on sales. Prior to any port issues, availability for next day delivery has been to lower percentage of the assortment for some categories within furniture. Stocking levels are expected to improve, although, this will require additional inventory investment. Based on the experience with the recent supply chain problems, we believe that improving availability will help generate additional furniture revenues. To comment now on Retail expenses as shown on slide five. Overall, Retail SG&A was 22.8% of sales compared to 23.1%. Lower sales than originally expected reduced SG&A leverage. We were able to counteract some of the impact of lower sales on certain expenses by adjusting forecast, particularly for advertising. Other corporate and overhead costs were most affected by the offered leverage. Advertising expenses increased with store opening pace, offsetting much of the operating leverage from increasing sales the last several years. In the first quarter we successfully executed on a number of efforts to increase advertising efficiency such as refining, targeted geography for both direct mail and print, and advanced buys for television. However, only three stores opened in the first quarter. In the second quarter the pace of store openings will accelerate, with more store openings, we don't expect advertising expense to be sustained at the same level as in Q1. Many of the planned new stores for this year in markets with existing advertising spending, advertising spending as a percentage of sales should benefit from these store openings in existing marketing areas. Advertising expenses for furniture and mattress retailers in particular are higher than for Electronics. Achievement of our furniture goal will likely require higher spending on advertising as a percentage of sales. However in the short-term investments are being made only in smaller scale test in selected markets to assess the ability to change furniture sales rates with additional advertising spending. We expect to be able to comment on these tests on the Q2 conference call. More products are delivered to customer's homes as the percentage of total revenues than in prior years with the decline in Electronics and Home Office as a percentage of total sales. Furniture deliveries are about 50% more expensive per delivery than Appliance or Electronics. Delivery cost is included in our SG&A as you can see on slide five. Transportation cost has also increased as we've added locations in smaller markets with our warehouses. Transportation of inventories in these locations is included in SG&A. Our distribution and delivery teams have done a terrific job reducing the cost per delivery and efficiently managing transportation. We expect the relative improvement trend in Q1 on these cost continued the next few quarters. Overall, Retail and Corporate SG&A has been well-controlled, growth plans have been refined to maintain this control. Many of the more recent additions to management have made important contributions to our improvement in Q1 compared to the prior year. Turning to our growth plans, we plan to open 15 to 18 stores in fiscal 2016 and are on track to complete the plan. Tighter underwriting standards over the last year and half admittedly minimally affected existing customer's approval rate. The impact of underwriting changes has reduced sales rates much more at newer stores than in mature markets. Advertising for grand opening has been scaled back to better allow for the sales team to develop skills and tenure, although, by no means a soft opening, grand openings are less frontloaded than in the past. With many stores opening in existing markets cannibalization remains a factor in both new store productivity and same-store sales. The Phoenix market was an exceptional example of this effect and we expect the impact of cannibalization to be reduced from the last several quarters. Given current underwriting, store opening locations and grand opening advertising strategy, we don't expect our new stores to return to the high levels of productivity of fiscal 2013, 2014 and early 2015. We now expect that stores will average about 70% to 75% of the sales of average stores in their first year. Accordingly, store opening plans for fiscal 2017 have been adjusted to target opening 22 to 25 stores. This is the modest increase designed to deliver a 15% growth rate in revenues from new stores. The increase in store openings should have no impact on credit risk, because we are targeting a consistent amount of revenue growth from new stores and related new customer originations. SG&A will come under some pressure from a few more stores but longer-term, we expect this to be offset, at least in part by improved same-store performance. Last December, the Board introduced a number of initiatives to provide additional oversight. The Board established a Credit Risk and Compliance Committee responsible for reviewing credit risks, underwriting strategy and credit compliance activities. This committee is actively engaged in supervising an independent evaluation of underwriting standards and collections performance. The evaluation of historical performance is complete and will now progress to developing additional information for the committee. The Board also approved additional positions to augment the management team. We have appointed a Chief Credit Officer to assist in analyzing and assessing risk. Additional searches for senior leadership are moving towards completion in the short-term. The Board of Directors also authorized management to actively pursue the sale of all, or a portion of portfolio or other refinancing of our loan portfolio. This process is well underway. The company, its advisors and prospective purchasers are engaged in active dialogue and exchange of information. There is considerable interest in acquisition of the portfolio and a potential ongoing arrangement to fund future originations. We expect the loan sale process to be completed this quarter or really next quarter. If Conn’s sells the portfolio, we believe we can increase the aggregate capital available to support our business strategies. Separation of the credit portfolio from the Retail business will allow the use of higher leverage on the portfolio. This higher leverage should reduce the after-tax cost of capital as well as increased availability. Removal of the loan portfolio from Conn’s financial statements would make financial analysis simpler. Current accounting for loan losses results in a mismatch of revenues and expenses. Loss recognition is frontloaded and interest earnings occur over time. The result of this mismatch is that a growing portfolio depresses earnings. The faster the growth, the more is the negative of the impact on earnings. Our loan sale and related loan arrangement could allow us to use the bank issuer. A bank issuer could allow charging a higher rate than some states allow today and enables the use of risk-based pricing. We could also charge one rate for all customers of similar credit quality in all states. Our loan sale transaction, assuming our on-balance sheet liabilities are restructured, retired, could enable returns of capital to shareholders or M&A. For these reasons and others, the company believes the loan sale and related ongoing arrangement to fund future originations has significant strategic value to the company and its shareholders. Despite the high level of interest, there is no assurance we will be able to complete a sale of the portfolio on terms acceptable for the company. Completion of the sale is also not required to execute our business plans. Fiscal 2016 is off to a good start. We faced and overcome a number of challenges over the last two years. The port situation has proven a temporary disruption that exposed the number of correctable weaknesses in management of our supply chain. Likewise, credit collection, system implementation issues were quickly overcome and the system is now delivering many of the expected benefits, including improved compliance. Conn’s distribution and marketing teams have done a great job addressing expense challenges from growth, while maintaining revenue and customer service performance. Goals for gross margins and furniture sales have been raised and we are progressing towards these increased goals. Sales, merchandising and marketing execution have successfully offset the significant impact of tighter underwriting on revenue. The company has hired and integrated a number of key executives and expanded the talent at all levels of the organization to support growth. Compliance functions have become more formalized and robust, although we have work yet to do. With steadily tightening credit standards over the last year and a half and improvements in collections execution, seasonally adjusted delinquency performance provides evidence of stabilization. Entry into delinquency has been stable and should improve with the tighter underwriting product mix changes and increased prime originations seasoning into the portfolio. The remaining major challenges to improve curing of delinquency in late stages accounts more than 60 days past due. This challenge is shared by many in the consumer credit market, but our performance appears to be somewhat worse than the market, although precise comparisons are not possible. Action, such as changing re-aging requirements has already been taken. A number of other actions are planned or being implemented to help improve late-stage cure rates over the next several quarters to the extent possible. We continue to evaluate our underwriting standards and product categories and may make further adjustments if progress is not made in improving late stage cure rates. Conn’s business model provides a sensible alternative for sub prime finance for consumers and a compelling overall value to customers. Our growth plans are intact and the loan sale is completed, will allow optimization of a proven business model. Now, I will turn the call over to Mike. Mike?

Thank you, Theo. Starting with underwriting on slide 6, is the average FICO score in the portfolio for the last five years. The portfolio has been in the narrow range of credit scores and remains there last quarter. We started making underwriting changes in late fiscal 2014 and throughout fiscal 2015 to reduce risks. These changes are summarized on slide seven. Slide eight shows the impact of these underwriting changes, which are estimated to have reduced the sales rate by 3% to 5%, compared to the first quarter a year ago. The impact of these changes should diminish in the second quarter and the remainder of the year as we lap the changes. Turning to slide nine. Beginning in late October of fiscal 2015, we began originating 18 and 24 months no interest loans to customers with prime credit scores as we had several years ago. As of May 31, 2015, 18 and 24 months no interest consumer loans represented 5.7% of the total portfolio and we expect this percentage to increase over the next few quarters. The average FICO scores of these loans origination was 697 during the quarter. The FICO score of all originations in the first quarter of fiscal 2016 was 617, compared to 605 in Q1 of fiscal 2015 and 611 in Q4 fiscal 2015. See slide 10 for our delinquency data by product category. Consistent with historical performance, appliances delivered the best delinquency performance while home office products delivered the worst. As our product mix shift towards more furniture and mattresses and appliance balances, it is expected to benefit our delinquency rates overtime. On the next slide, slide 11, you can see the trend in the portion of new and existing customers, which after several quarters of increases in new customers has reversed recently with the percentage of originations to existing customers beginning to increase, compared to the same period in the prior year. I would note that we typically see a higher percentage of repeat customers during the fourth quarter related to holiday purchases. At this time, internal and external valuations of underwritings have not identified other underwriting changes necessary to achieve our objectives. We have engaged FICO to update our risk scoring model and provide a more advanced tool for early payment default detection. This engagement may yield changes to underwriting later in the year. As Theo commented, the consultants engaged by the Board to review the portfolio and underwriting has completed their assessment of the historical performance. Their findings have largely confirmed our previous comments about the drivers causing deterioration in portfolio performance over the past few years, including the increase in new customers in the portfolio. The changes in policies, specifically more restrictive re-aging requirements and a more conservative charge-off policy and the system implementation issues experienced during fiscal 2014. Additionally, their analysis confirmed that the performance deterioration in late stage delinquency resulted primarily from cure rates declines across all risk levels for new and existing customers and not underwriting changes. And as we have seen in other reports, their data also confirms that this trend occurred in bank credit cards as well. Turning to static loss trends, it appears the static loss rates will end higher than our most recent projections. However, it should be noted due to our decision to stop selling charged-off accounts, current static loss rate trends are being negatively impacted by the reduced recoveries. We expect to collect these amounts over time through our own recovery collection efforts, which should benefit the static loss rates in future periods. Additionally, as can be seen on slide 12, the speed of portfolio runoff has accelerated in recent quarters and is especially evident for fiscal 2014 and fiscal 2015. With only 2.6% of the original balance remaining, fiscal 2014 is a quarter or more ahead of the previous vintages. Fiscal 2015, which have 480 basis points more of this origination balance remaining at the end of the year of originations compared to fiscal 2014, is now only 120 basis points higher and has gained ground each quarter since the year of origination. This acceleration in the amortization of the vintages is being driven by a return to our historical account combination practices and is expected to reduce future losses. It is important to understand that when applying for a new purchase, the customer must satisfy all underwriting requirements, including being current on all existing accounts. Lastly, as we return to some of our historical re-aging practices, the benefit of additional cash collections is expected to help reduce the frequency and severity of future losses. Our currently re-aging practices are still more restrictive than those in place prior to fiscal 2012, capping the number of times an account can be re-aged and requiring a meaningful payment to be re-aged. Re-aged accounts as a percentage of the portfolio decreased 50 basis points from the end of Q4, compared to an increase of 30 basis points for the same period a year ago. While we believe that the static loss rates will improve sequentially from fiscal 2014 to fiscal 2015 and again for fiscal 2016, the current allowance for bad debts implies static loss rates of approximately 9.5% for fiscal 2013 and roughly 12.5% for fiscals 2014, ‘15 and ’16. The originations for the last half of fiscal 2015 have exhibited better delinquency trends in fiscal 2014 and early fiscal 2015 vintages. While the proportion of new versus existing customers in the portfolio increased in fiscal 2015 compared to fiscal 2014, the pace of increase has slowed in fiscal 2016. This will offset some of the benefit of improved collections performance and tighter underwriting. Slide 13 shows recent trends and near-term expectations for several origination and portfolio metrics. The weighted average credit score and mix of high versus low score customers at origination has trended towards higher quality and we expect to maintain the recent levels. The average income at origination has trended higher with the addition of the higher FICO customers and we expect to maintain the recent levels there too. As noted earlier, the proportion of originations to new customers has been decreasing year-over-year recently and we expect that trend to continue. We expect the portion of originations supporting sales from home office and consumer electronics products to decline. First payment default balances over 30 days past due as a percentage of the portfolio have been declining which we expect to continue given the higher average credit score underwritten, higher average income, and decreasing proportion of new customers underwritten. And average account age has increased slightly year-over-year and we expect that trend to continue given the slower growth rate of the portfolio. It will take time for these changes to be fully reflected in portfolio performance, especially in late-stage delinquency. In fact, as of April 30, nearly 40% of the balance is 90 or more days past due were originated prior to fiscal 2015, more than 15 months ago. Our long-term goal is to deliver a static loss rate of 8%. The changes we have made in underwriting increased originations to prime score customers, improvements in collection operation and policies, and changes in customer and product mix should help move us towards that goal. Additionally, we will continue to review underwriting and make changes as appropriate. In the first quarter, total originations grew 17% over the prior year quarter compared to a growth rate of 34% a year ago. The portfolio grew 1.2% from January 31 to April 30, compared to 3.4% growth in the prior year period. Slower portfolio growth is benefiting the underlying performance of the portfolio but has a negative effect on the reported delinquency rates. A year ago our collection operations were under extreme stress from portfolio growth. Rapid growth in the workforce led to high turnover rates and a workforce with minimal tenure. At the end of April, a year ago, 46% of collections agents had more than six months tenure at Conns and a large percentage of the managers and supervisors were new as well. At the end of April of fiscal 2016, 72% of collections agents have tenure of more than six months. All of our managers have more than two years tenure today and senior leadership for the collections operation hired or promoted in fiscal 2015 have had time seasoned. Portfolio growth and staffing needs have become more predictable and we believe the team is well-positioned to execute our plan. Our objective is to improve execution over the course of the year. Sustained improvement will be needed before the provision rate and related reserves will decline. We do not expect a decline in the reserves in the second quarter. Second quarter fiscal 2016 delinquency is expected to increase seasonally. May greater than 60-day delinquency is up seasonally to 8.5%. A quick update about the regulatory environment, the CFPB recently announced that they are considering including large installment lenders under their oversight. At this time, as the retail installment seller, it is not clear if we would be included. However, we are continuing to proceed under the assumption that we will ultimately be subject to CFPB regulation and the potential portfolio sale or forward flow arrangement could accelerate that timeline. We're not aware of any other significant regulatory developments that would impact us at this time. We have remain focused on achieving and maintaining appropriate staffing levels and improving underlying credit quality origination and we will continue to identify opportunities to improve execution and credit quality. Now I will turn the call over to Mark Haley. Mark?

Thank you, Mike. Starting with the retail segment financial performance, total retail sales were $298.5 million for the first quarter of fiscal 2016, an increase of $20.9 million, or 7.5%. This growth reflects the impact of the net addition of 12 stores over a year ago, partially offset by a decrease in same-store sales of 4.3%. As we highlighted in our April sales release, same-store sales for the quarter were negatively impacted by tightened underwriting and supply chain disruption as a result of the prolonged port labor dispute, which is most evident in the furniture category. Retail gross margin was 41.3% for the quarter, a decrease of 10 basis points from the prior year period, primarily as a result of unleveraged warehousing costs. However, you should note that delivery, transportation and handling costs also as a percent of product sales and repair service agreement improved by 20 basis points, favorably impacted by the new warehouses as well as other efficiencies gained in our delivery operations. Retail SG&A, excluding the delivery costs, was 22.8% for the quarter, compared to 23.1% for the same period a year ago. The 30 basis point decrease was primarily due to improved leveraging of advertising expense compared to a year ago. This benefit was partially offset by unfavorable medical expenses as we have experienced significantly higher cost of claims. During the quarter we recognized $619,000 in charges related to facility closures and professional fees associated with the review of strategic alternatives and the class action lawsuits compared to $1.8 million charge a year ago due to facility closure costs. On an adjusted basis, the retail operating margin increased to 14.5% during the quarter from 14.2% last year. Now turning to the credit segment, finance charges and other revenues were $66.4 million for the first quarter of fiscal 2016, an increase of $9.1 million, or 15.9%. This increase was primarily driven by 26.4% increase in average balance of the portfolio, partially offset by decline in yield as a result of higher provision for uncollectible interest and increased balance of 18 and 24 months equal payment, no interest finance programs we started late in the third quarter of last year. Credit SG&A expense for the quarter increased 15% year-over-year also due to the growth in the portfolio but were down as a percent of the average portfolio balance outstanding to 8% from 8.8% last year. The credit segment was also negatively impacted by the unfavorable medical expenses we experienced during the quarter. The provision for bad debts increased $25.3 million from the prior year to $47.5 million for the quarter. The increase resulted from several factors, including a 26.4% growth in average portfolio balance and 17.5% increase in origination volume compared to the same quarter last year. A year-over-year increase of 40 basis points in the 60-plus day delinquency is accelerated pace of realization of credit losses and $9 million increase related to a 6.9% increase in balances treated as troubled debt restructuring. As a result of these factors, the reserve for bad debt as a percent of the portfolio balance was 11.1%, compared to 6.6% last year and 10.8% at the end of last quarter. Interest expense rose $4.7 million on increased borrowings and higher effective interest rate due to the senior notes issued in July of last year. Turning now to our balance sheet and liquidity. As of April 30, 70% of our $129 million in inventory was financed with outstanding accounts payable. Our inventory turn rate was approximately 5.5 for the quarter. Keep in mind, inventory levels declined from January to April due to the port disruption. Turning to slide 14, total debt was $720 million at April 30, or 52% of the total customer portfolio balance after paying down $54 million during the first quarter. At the end of the quarter we had $474.9 million of borrowings outstanding under our revolving credit facility, including standby letters of credit issued with a total of $405.1 million of total borrowing capacity available. As of April 30, we were well within compliance of our debt covenant. Our cash recovery rate was 5.51%, compared to 5.79% a year ago, well above the required minimum level of 4.49%. The decrease in the cash recovery rate was primarily due to our discontinuation of the three months and six months no interest finance program in August of 2014. Based on current facts and circumstances, we expect to remain in compliance with our debt covenant and we believe we have sufficient liquidity for the foreseeable future. For the second quarter of fiscal 2016, we expect the percent of net charge-offs to the average outstanding balance to be between 11.5% and 12% and interest income and fee yield to be between 16.5% and 17%. The yield is impacted by the growth in our 18 and 24 months no interest program as well as the elimination of certain fees previously charged to customers. For the full fiscal year, we are reaffirming our expectation of change in same-store sales to be flat to up low-single digit and retail gross margin to be between 40% and 41%. Before opening the Q&A portion of the call, I would like to note that the company will not be participating in any investor conferences during June while we concentrate our efforts on the portfolio. I will now turn the call over to the operator to begin the question-and-answer portion of our call.

[Operator Instructions] Our first question comes from the line of Peter Keith from Piper Jaffray. Please proceed with your question.

Good morning, everyone. Thanks for all the detail on the call.

Good morning.

I wanted to ask Theo about the commentary about under a floor arrangement that the interest rate in terms that it might be adjusted. I was wondering if you could provide a little more detail on that, perhaps how -- what percent of the portfolio is currently under some type of state cap and just your level of comfort as a retailer with potentially seeing that interest rate move up.

Okay. I don’t have the exact numbers in front of me, but roughly 90% to 95% of the portfolio is subject to some form of a cap. We have unlimited interest rates in Arizona, New Mexico, and Nevada, but other than that we operate in states that have some form of a cap -- sorry South Carolina is another uncapped state. And those represent a fairly small percentage of our outstanding consumer loans and originations. We are charging in states that are uncapped, about 28%. And in those states, we hadn’t seen a significant impact on revenue rates as we made adjustments through upwards, don’t anticipate in the event that we were able to charge uncapped rates in all markets that our interest rates would be as high as 28%. But we are confident that we could charge more than the average of about 21.5% that we charge today and without having a negative effect on sales because of the modest impact on the monthly payment amount for the customer.

Okay. That’s helpful detail. As a follow on to that, I was curious about, I think, you suggested, you could look at interest rate across the entire portfolio maybe by quality of Credit customer? Is that -- did I interpret that comment correctly that you might use some type of tiered approach for new or repeat under some type of full flow arrangement that that could be a possibility?

Yes. We could have a tiered approach. I don't think we would have a complex set of tiers and pricing. But I believe we could have a tier that would allow us to underwrite customers that we don't underwrite today and charge a higher interest rate than we charge today for that group of customers. The benefit that we give to higher Credit quality customers is our zero interest rate program. So I don't believe we would look to lower rates for better Credit quality customers. It's really just giving them the opportunity to pay no interest to the extent that they make their payments on time and payoff the loan within the prescribed period.

Okay. That's helpful feedback. Thank you. I did want to ask another question, maybe directed more towards, Mike. With the change in or lack thereof selling charged off accounts now, I was curious on what the impact that it’s having on your static loss table? The FY15 vintage is running at 2.6% losses, one quarter out to the year versus the 2014 at 2.1%? And I wonder if you quantify what the impact is on the year-over-year change from no longer selling pay account.

You bet. I had start-off by saying on the period, the charge-off for the period it’s about a 40 to 50 basis point impact on the charge-off rate for the quarter. And then on static losses depending on which fiscal period you're looking at between ‘13, ‘14 and ‘15, cumulatively its can be somewhere in the 30 to 40 basis point range.

That's great. Thanks for all the feedback. I will get back in the queue.

Thank you.

And our next question comes from the line of Brad Thomas from KeyBanc Capital. Please proceed.

Yes. Thank you. Two questions if I could. First on the underwriting side, you did talk about on the static losses, that long-term target of 8%. And my question is with all of the initiatives in place today to improve the quality of the Credit portfolio. Do you think there's enough going on to get you to that level or are there other changes that you may need to make to get to that level?

Brad, we're continuing to monitor the performance of the portfolio and the impact of the changes that we've made thus far, but there could be additional changes that we need to make and those changes could be reflected either by changing our underwriting standards or changing the product mix. And as I said, we're continuing to monitor performance and we’ll make changes as we see they are necessary overtime.

Great. And then, if I could follow-up on some of the cost buckets from slide five that you have highlighted, specifically the delivery costs and advertising costs, those have obviously come up over the last couple of years and they would seem to be areas that you can get significant leverage as you infill some of the new markets that you’ve recently entered, put by the same talking you did highlight that the cost can be higher with some of the sales of furniture and appliances. How much margin opportunity do you think there is from the fill-in opportunity that you have ahead of you?

The fill-in opportunity has impacted in two areas, one, in gross margins because we’re more efficiently using the warehouse capacity that we have and the impact of that improved leverage could be in the range of 50 basis points or more, as we opened stores that are served by those warehouses. And then we don't expect significant declines overtime and delivery, transportation and handling costs so much as we believe that those -- that the relative trend of significant year-over-year deterioration have been reversed. And then advertising, we should receive some benefit, but we don't expect to see that advertising expenses in total, including new stores will return to the levels that we saw several years ago when we weren’t growing. But if you look at our advertising expenses in mature markets, it's actually lower than historical norms as we become more efficient in our use of media and more targeted towards our core customer.

That's very helpful. Thank you so much.

Thank you.

And our next question comes from the line of Rick Nelson from Stephens. Please proceed.

Hey. Good morning. And also financing increased to 85% of the sales, I think, it were 75% last year and third-party dropped to less than 3% and compared to 11% last year. If you could tell us about that change provide some color there and what the economics are for that third-party credit into your own books?

You bet. So Rick, this is Mike. So I would, referring back to slide nine in the slide deck, that’s directly related to our originating the 18 and 24-month no interest program. Synchrony was previously providing all of that financing for our customers and that's where we're getting this near 700 FICO customer into the portfolio and its driving a meaningful increase in the percentage of our originations from a higher FICO score customer. From an economic standpoint, its running through the margin and it shows up in the Retail gross margin that we need discount on those loans and it’s similar to the economics we had with synchrony.

But you do see the impacts on yield from origination of lower yielding accounts. It's not a zero yield, because there is a discount to the sale amount. It’s not zero yield but it is lower than our average yield.

Thank you for that. Also, noticed that the number of active accounts was down sequentially and the average balance. Was there a change in that calculation?

So couple of things to your two points. One, the number of accounts, one, that's typical seasonally. It impacts season. We have a lot of people that liquidate their accounts. Additionally, we’ve talked about the increase and combining of accounts. And so that is also impacting the number of accounts. And then to the balance, probably should have called this out in the call. We changed the reporting to be the average outstanding customer balance instead of the account balance that we used to show so that you can see the impact to what the average customer has outstanding.

Thank you for that. Also curious, there has been discussion about Bluestem is paying a potential model that accounts could employ with a third-party finance provider. Any comments on that as a model?

Sure. Yes. The Bluestem transaction could serve as the potential model for a transaction that Conns would enter into. But there are other examples of transactions, particularly in the mortgage space. So, I think there are more examples of the kind of transaction that we’re contemplating then even we were aware of when we entered into expiration of the loan sale. So, I think there are actually quite a few examples of similar lease structured transactions. It's more market normal than we fully expected when we started the process. Bluestem is simply the most pertinent of all the examples that exist in the marketplace. I'm not sure that that's a perfect model for us, for a number of reasons but the overall conception I think is similar to what we would contemplate.

And do you expect turning the flow through agreement is going to be in that cost to Conn’s, to the retailer to source sales in the future?

Yes. We would expect that if we entered into a flow arrangement, it would have a net cost to us. On the other hand, we would have significantly less capital employed. And our returns on capital would increase from levels that we experienced today. So overall, we do believe the flow arrangement would be modestly dilutive to earnings, but on the other hand our capital employed would be much lower.

Thanks a lot and good luck.

Thank you.

And our next question comes from the line of Scott Tilghman from B. Riley. Please proceed with your question.

Thanks. Good morning.

Good morning.

Wanted to see if you could update us -- you could update us on your real estate strategy? You discussed some relocation and expansion plans, some others being explored. There have been some puts and takes on merchandising over the last year and still coming up. So, I guess what I'm wondering is as you move forward, do you expect the box size changes to have a material impact on margins either on the positive side or the negative side?

Okay. We expect over the next several years, the average square footage to first order expand slightly. Our model -- our perfect storm would have a little over 40,000 square feet today and we don't expect to achieve that average in our store portfolio collectively. We think that sales per square foot in those larger formats might be somewhat smaller than our sales per square foot today. But that the overall gross profit margin dollars produced per square foot would actually be higher. And we think the overall impact of slightly larger stores will be an increase in gross margins and net margins overall.

So just to make sure, I'm hearing you right, even though the sales per square foot would be lower the actual productivity of the box would be higher.

That’s right because the gross margins produced by additional furniture sales are so much higher than our average gross margins today.

And then just a related question. If you look at the changes that have occurred in mix over the last couple of years, how do you think about merchandising as the box size increases?

Obviously, furniture, mattresses become more important to us. And I think, we would emphasize those categories as we talked about on many occasions and I would just reiterate. We have the ability to improve our execution in all aspects of furniture sales. And so for us, the opportunity with the larger box is to enable us to compete more effectively as the furniture retailer. And today, we don't advertise the category except minimally. We are really just utilizing our existing customer base to sell them an additional product and we’re not as effective in sales for execution with the category as well. And as we expand the footprint and the throughput per location, we think we'll have the opportunity to improve our sales for execution as well. So, we think the change over time will be times becoming a better furniture merchant and retailers than we are today.

Great. Thank you.

Thank you.

And our next question is a follow-up from the line of Peter Keith from Piper Jaffray. Please proceed.

Hey. Thanks a lot. So a couple of quick follow-ups. The May comp, I think you said was 4%. I was wondering if you did see any negative impact in recent week from some of the flooding and if actually port issues were still a drag on May overall?

I don’t believe the port issues were a meaningful drag on May overall, still impacted our Pearl Street furniture category. But overall, I’d say it was a minimal impact. The flooding issues affected a few stores for a brief period of time but not in any material way overall. And in fact at some point, we might experience a benefit related to those flooding issues that as customers replace damaged products in their homes. But we also don't expect that to be significant because the flooding was not that widespread. So in summary, the flooding is not expected to have a material impact on us one-way or another.

Okay. That’s helpful. Also, I wanted to confirm that you were talking, Theo, about remodels and reloads. If I heard correct, I think it was the 10 this year and then you still have 11 more, so in aggregate 21 stores in total. And then as a follow-up on that, what type of comp lift are you seeing the phase of a remodel or relo as you can expand that furniture area?

Yes. Just to clarify there, at this point they're really not remodels, they are relocations. The store base where we expect to remain in the current location has been fully remodeled. The activity today is to relocate to other locations or expand the existing footprint and then current location. The comp lift have not looked at that that recently, so I hesitate to make a guess, but we do continue to see a significant positive benefit, particularly in the furniture category, and to certain extent over the last quarter or two that comp lift has been masked by the impact of the port situation. I think May is reflecting a more accurate view of how those remodels and relocation should benefit comp performance.

Okay. And in aggregate, it’s still 21 stores you’d like to relo?

Yes. So we are talking about a period of several years as we are not anticipating significant costs or charges related to those remodels. It's more around the time of the expiration of the leases or in collaboration with existing landlords.

Okay. Thanks. One last unrelated question is, regard to the CFPB. You had mentioned that you are proceeding as if you will be included with their oversight in the future. What changes have you made, if any, to say your procedures are now sort of under your expected guidelines that may comfort at the future date?

We continue to monitor the guidance issued by the CFPB and other bodies and make sure we're addressing that commentary in our compliant structure. And then as Theo noted in his prepared remarks that we are -- we have invested in formalizing our compliant structure and continue to invest there.

Yes. I would just summarize that sound a lot. There have been significant changes to our collections practices and collections operations as a result of planning for compliance. And many of those changes are really formalization of existing practices. But in other cases, they are actual changes. And I think perhaps most significantly, it's our view that although the FDCPA does not apply to Conns under the law that the view of the CFPB would be that it does apply. And so we're taking the steps to apply to FDCPA which does have an effect on collections practices.

Okay. Thanks a lot for all feedback, guys.

Thank you.

And our next question comes from the line of Ben Clifford from Nomura Securities. Please proceed with the question.

Hey, guys. Thanks for the call. Just want to get a little feedback on a hypothetical, what if the credit portfolio sold and that you entered into a floor agreement. What are the costs that stay with the credit business in terms of collections?

The costs stay with the credit business under the planned structure would be same cost that we have today. We would also receive feedback for servicing, the portfolio which would offset a substantial part of those costs, but would not offset corporate overhead and some other cost, but would cover substantially all of the direct -- it's not all -- of the direct costs of servicing the portfolio.

So in terms of the direct cost associated with the portfolio, what do they run at as a percentage of portfolio, right now?

They are into 78.5%.

75%.

5% of the average portfolio balance.

So if you enter along this floor agreement, do you think you will get a 5% servicing fee?

We believe that we will be able to achieve the fee that covers our costs and expenses.

And based on our understanding of market servicing fees for similar transactions that would be market normal.

Okay. Thanks for that commentary. And then you said that you expect the loss rates for the 2014, 2015, and 2016, origination years to fall around 12% to 12.5%. I’m just wondering how that 12.5% loss rate that you're underwriting to right now. How does that fall into your 8% loss rate overall?

To clarify we did not say that’s what we expect the static loss rate to fall. We said that is what the allowance for the bad debt implies. Our actually commentary was we expect fiscal '15 to be -- static loss rates to be lower than 14, and for fiscal '15 to lower than 15, and that with the changes in product mix and the customer mix and the underwriting changes over the last year. We expect to continue that trend to continue towards the 8% level overtime.

All right. That makes sense. And then just last question in terms of decision to bring the change-off collections in-house, what drove that decision? Was there a partner you’re using before that wasn’t working out or I guess just what drove that decision?

I think it relates to the commentary we had earlier about changes in our practices relate to potential future regulation by the CFPB.

Okay. Sorry -- just one last question. The trend commissions revenue that you earned in the credit segment appear to be down compared to last two quarters. Is that -- what drove that decline?

It was mostly the result of us adjusting prices downward for our most significant insurance product, which is property and insurance.

All right. Thank you.

Thank you.

And our next question comes from the line of Michael Cohen. Please proceed. We have no further questions in the queue at this time. I would now like to turn the call over to Mr. Wright for closing remarks.

All right. Thank you everyone for joining.

Ladies and gentlemen, thank you for attending today’s conference. This does conclude today’s program. You may now disconnect. Have a wonderful day.