Norm Miller - Chief Executive Officer Lee Wright - Chief Financial Officer

John Baugh - Stifel Brad Thomas - KeyBanc Capital Markets Brian Nagel - Oppenheimer & Company Rick Nelson - Stephens Bill Ryan - Compass Point

Welcome to the Conn’s, Inc. conference call to discuss earnings for the fiscal quarter ended July 31, 2018. My name is Doug and I will 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 a question-and-answer session. As a reminder, this conference call is being recorded. The company’s earnings release dated September 4, 2018 distributed before market opened this morning can be accessed via the company’s Investor Relations website at ir.conns.com. I must remind you that some of the statements made in this call are forward-looking statements within the meaning of federal securities laws. 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 Norm Miller, the company’s CEO and Lee Wright, the company’s CFO. I would now like to turn the conference call over to Mr. Miller. Please go ahead.

Good morning and welcome to Conn’s second quarter fiscal year 2019 earnings conference call. I will begin the call with an overview and then Lee will complete our prepared remarks with additional comments on the financial results. Results for the second quarter of fiscal year 2019 demonstrate the powerful business model we have created and our focus on driving and achieving profitable growth. GAAP earnings per diluted share grew 279% from the prior year period to a record second quarter of $0.53 per diluted share. The 3.5% increase in total retail sales driven by positive same-store sales and the addition of new stores together with record retail gross margin and continued improvement in credit segment performance, all contributed to the significant increase in second quarter earnings. Improving profitability provides us with a greater ability to support our meaningful growth opportunity and we continue to make investments to enhance both our credit and retail operation. In addition to record second quarter GAAP earnings per diluted share and retail gross margin, we achieved several other milestones during the second quarter, including credit segment revenues and a record net yield. Same-store sales, interest expense and 60 plus day delinquency all improved to the best levels we have achieved in multiple years and the credit segment produced the second consecutive quarter of positive operating income. Before I go into the specific credit and retail trends that drove our strong second quarter performance and the strategies we are pursuing to continue to create value for our shareholders, I would like to review the leadership changes we announced this morning. Since I became CEO 3 years ago, you have continually heard me talk about the importance of leadership. Conn’s has a unique business model and we need to ensure that we have the right people in the right place throughout our organization to achieve our goals. I am pleased to announce the promotion of John Davis to President of Credit and Collection. JD has played a critical role in leading our credit segment transformation and is responsible for much of our recent success within the credit business. With additional oversight now over all aspects of our credit and collections department, I am confident that JD’s experience, knowledge and drive will create additional value for our company. Today, we also announced the departure of C.R. Gaines as President and Chief Operating Officer of retail and I wish him all the best in his future endeavors. I have temporarily assumed C.R.’s responsibilities and an active search is underway for a permanent replacement. Later in this morning’s call, I will review some of the ongoing retail growth strategies we are pursuing and why we are so optimistic about our future, but for Conn’s to be successful, we need to improve our retail execution and produce more consistent results throughout our retail operation. We are addressing these near-term execution challenges and believe our model can produce consistent annual retail growth of 8% to 10% while managing credit risk. At this level of growth our business model is extremely powerful and create significant value for shareholders. So with these highlights, let’s look at our second quarter results in more detail starting with our credit business. Improving credit trends and favorable portfolio composition contributed to the second consecutive quarter of positive credit segment operating income. Our credit spread which is the difference between interest income and fee yield and net charge-off percentage increased to 750 basis points for the second quarter of fiscal year 2019 compared to 390 basis points in the prior year period. For the second quarter interest income and fees were a record, $80.4 million and increased nearly 16% from the prior year period as a result of higher interest rate and better charge-off performance. This drove 260 basis point improvement in our net yield which was a record 21.3% for the second quarter of fiscal year 2019. Segments of our portfolio including current originations are already producing our 23% to 25% net yield goal and we are confident the entire portfolio will be at that level within 12 months. I am pleased to report that our 60 day plus delinquency rate declined 50 basis points from 9.5% in the first quarter to 9% in the second quarter, representing the first decline from the first quarter rate in 7 years. In addition, on a year-over-year basis the 60 day plus delinquency rate declined 140 basis points which is the fourth consecutive quarter this rate has shown improving year-over-year trend. Looking at re-aged accounts at July 31, 2018, the percentage of the portfolio previously re-aged declined 20 basis points over the past three months. Overall the performance of re-aged accounts including TDR accounts has significantly improved. The 60 day plus delinquency rate of TDR balances was approximately 500 basis points lower than the same period in the prior year and marks the fourth consecutive quarter that the delinquency rate was lower on this portion of the portfolio versus the prior year. Looking at credit losses, annualized charge-offs as a percent of the average outstanding balance were 13.8%, 100 basis point improvement over the same period last year. It is also important to note that net charge-offs were $3 million lower this quarter compared to the prior year quarter. As expected charge-offs were higher sequentially primarily due to seasonality and the benefits the tax reforms have on first quarter performance. As we stated on our last call since the fourth quarter of fiscal year 2015, we have accumulated a balance of charged-off accounts of over $700 million and therefore have a meaningful opportunity to convert charged-off accounts to recovery dollars. The investments we have made to develop a robust recovery process and infrastructure continue to pay off. During the second quarter of fiscal year 2019, we collected $4.8 million of recoveries compared to $2.3 million for the same period last fiscal year. We believe full year recoveries will be more than $20 million in fiscal year 2019 compared to $10.9 million in fiscal year 2018 and only $5.8 million in fiscal year 2017 demonstrating the significant improvement in this area. Based on current portfolio trends improving recovery expectations and enhanced collection capabilities cumulative charge-offs for fiscal year 2018 continued to perform better than the prior year. As a result we continue to expect the terminal loss rate for our fiscal year 2018 origination vintage to be in the mid-12% range. We remain encouraged by current loss trends and believe our underwriting standards are appropriately controlling risk. Our second quarter credit results demonstrate better operating performance and favorable credit trend. For the first half of fiscal year 2019 credit segment operating income was $1.6 million compared to a loss of $13.9 million for the first half of fiscal year 2018 and a loss of $50.4 million for the first half of fiscal year 2017. This $52 million 6-month credit segment operating income improvement over the past 2 years is a result of the successful execution of our credit segment transformation plan, which has also contributed to a significant reduction in our interest expense over this period. I am extremely pleased with the continued strength of our credit segment performance and we are well positioned to achieve our goal of a 1000 basis point credit spread over the next 12 months. With a well-run credit operation in place, we have the appropriate foundation to support our compelling retail growth opportunity. So, let’s look at our retail performance for the second quarter of fiscal year 2019 and review why we are so excited about the tremendous opportunity to grow retail sales. Our retail performance during the quarter was driven by positive same-store sales, the contribution of new stores and record retail gross margin. Second quarter same-store sales increased for the first time in 3 years with total retail sales up 3.5% over the prior year period. Second quarter sales increased despite weaker than expected lease-to-own sales, headwinds in the appliance category as a result of recently imposed tariffs and challenges in the mattress industry. In addition, July 4 holiday fell on a Wednesday, which we believe also impacted traffic during this important promotional period. Retail gross margin exceeded our expectations and was a record 41.4%. Margins continue to benefit from favorable mix within product categories, higher product margin and our focus on initiatives to improve performance and efficiency. While we believe there are still further opportunities to expand retail gross margin on a year-over-year basis, we do not expect retail margin to increase at the same magnitude as we have experienced over the past couple of years. With these highlights to retail performance, let’s look at some of the conversion and credit utilization drivers influencing sales, our initiatives to capitalize on our compelling market opportunity and strategies to optimize the three components of our retail platform: marketing, merchandising and in-store execution. As announced on our last call, we hired a new Chief Marketing Officer who is now approximately 90 days into his role. With his vast amount of experience in the durable space, he brings a fresh perspective on advancing our marketing strategies to increase consumer engagement and overall brand health. As his tenure increases, we will update investors in future quarters and how our plans are developing. Turning to the merchandising component of our retail operation we have assembled a strong merchandising team with significant experience across all product categories. There are meaningful opportunities to drive retail growth by refreshing and expanding our product categories and the strategies this team is putting into action are encouraging. The turnaround of our home office category is an example of the successful execution of our merchandising initiatives. About a year ago, the merchandising team conducted a full line review and subsequently developed a plan to refresh and improve the product assortment within the home office category. This included revamping the assortment to fit our better best retail strategy and offering products more aligned with customer preferences. The result of our home office refresh was a 26.1 percentage point swing in quarterly same-store sales over the last 12 months. Home office same-store sales were up 8.5% during the second quarter of fiscal year 2019. And since we implemented this refresh, we have produced 9 straight months of positive same-store sales within this category. Over the next year, we will be focused on replicating the success of our home office refresh to other product categories. This includes a major update of our furniture assortment to drive sales in this important high margin business. One of the first efforts in the furniture category was the successful launch of new wall art and home accessories programs in the second quarter. Additional assortment updates to our furniture category, particularly in upholstery, bedroom and dining will occur over the next four quarters. Our merchandising team is also introducing new complementary products. The recent introduction of gaming bundles across all our stores produced incremental growth in our consumer electronics category during the second quarter and this category is now well positioned headed into the important holiday season. Within our furniture business during the third quarter, we are launching bar stools across our chain which we believe will add incremental sales to this segment of our business. We are also adding robotics vacuums across our store base and continuing to test smart home products. There are multiple opportunities to improve and expand our product assortment over the next several quarters and I am encouraged by the successful merchandising strategies underway. As you can see there are lot of positive trends within our retail segment, but produced the low single-digit same-store sales growth we expect and believe our model can support we need to continue to improve our retail execution. This is the top priority of the leadership team and we are focused on upgrading the quality of field management, improving associate training, enhancing the customer experience and making it easier for customers to interact with us. The important indicators of retail execution include lease-to-own sales, credit applications as a percent of traffic, closing rate, attachment sales and customer ratings. Analyzing the performance of these indicators across our districts which we define as approximately 8 to 10 stores shows a distinct difference between our top and bottom districts. During the second quarter, the average same-store sales performance of our top three districts was up approximately 6%. This compares to the average of our bottom three districts which was down approximately 7%. Our top and bottom performing districts include both new and existing geographies which gives us confidence that the variability between districts is primarily a function of retail execution. Strong experience leaders that properly motivate, train and support their team members while holding them accountable to our sales goals and expectations are the key drivers of top performing districts. Therefore we are continuing to upgrade district and store management talent by attracting, developing and nurturing managers to support our store base and improve our retail execution. Looking specifically at lease-to-own sales, Progressive remains a committed partner and we continue to believe lease-to-own sales can ultimately grow to 10% of total retail sales. In certain districts lease-to-own sales are approaching this level today. However, in other districts the penetration rate of lease-to-own transactions underperformed during the second quarter which caused the company average to decline. I would like to call out though that even with the lower quarter-over-quarter rate for the second quarter our lease-to-own sales are still over 100 basis points higher than the historical average under our previous provider excluding the time prior period prior to our transition to Progressive. We are increasing the training of our sales force and driving greater accountability amongst our retail managers which includes linking compensation with lease-to-own penetration rate. Early indications show improving results and we expect third quarter lease-to-own penetration rates to increase from second quarter levels. We are confident our retail execution is getting better, but as our third quarter same-store sales guidance shows it will take time to complete our retail transformation and get all of our districts aligned on performance. In addition, during the third quarter we will begin lapping stronger same-store sales comparison in markets impacted by Hurricane Harvey as rebuilding efforts got underway during the third quarter of the previous fiscal year. This will impact both our third and fourth quarter same-store sales comparison. There continues to be meaningful opportunities to profitably grow our retail business and investing in new stores remains an important part of our overall growth plan. During fiscal year 2019, we plan to open a total of seven to nine stores including the two new stores we opened during the first half of the fiscal year. In the third quarter we plan to open three new stores which includes one store in Virginia which we recently opened. Our new stores are performing well and providing us with increasing confidence in our retail expansion plan. As a result, we are planning to open a total of approximately 10 to 15 new stores in existing states next fiscal year. We are also upgrading our retail infrastructure to support our growth and on August 15 we announced construction of our new state-of-the-art Houston distribution center that will increase the capacity and efficiency of our retail operation. So to conclude my prepared remarks before I turn the call over to Lee, second quarter results demonstrate that our business model can produce strong earnings even without significant retail growth. We believe our retail model and credit platform can consistently support an annual retail growth rate of 8% to 10%, which includes low single-digit, positive same-store sales and a mid to high single-digit contribution from new stores. Our business model becomes extremely powerful at this level of sales and this is what the senior leadership team is focused on achieving. Our credit business has been transformed into a sophisticated, well-run and compelling component of our overall business model and we are applying the same disciplines and approach that drove our successful credit transformation to the retail side of our business. Therefore I am confident we can optimize the performance of our retail business and capitalize on our sizable market opportunity. We are headed in the right direction and we believe we are well-positioned to create increasing value for our shareholders. With this, let me turn the call over to Lee.

Thanks, Norm. Consolidated revenues of $384.6 million for the second quarter of fiscal year 2019 increased 4.9% from the same period last year. GAAP net income improved significantly to $17 million or $0.53 per diluted share for the second quarter of fiscal year 2019 compared to $4.3 million or $0.14 per diluted share for the prior year quarter. This represents our fifth consecutive quarter of profitability and record second quarter GAAP earnings per diluted share. On a non-GAAP basis, adjusting for certain charges and credits and losses from extinguishment of debt, net income for the second quarter of fiscal year 2019 was $0.57 per diluted share compared to $0.26 per diluted share for the same period last fiscal year. A reconciliation of GAAP to non-GAAP financial results is available in our second quarter press release that was issued this morning. Second quarter of fiscal year 2019 retail revenues, were $296.4 million, which increased $9.9 million or 3.5% from the same quarter a year ago. For the second quarter of fiscal year 2019, same-store sales were up 0.3%. Retail gross margin, as a percentage of retail revenues for the second quarter of fiscal year 2019, expanded by 160 basis points from the same quarter in the prior year to a record of 41.4%. The improvement in gross margin is primarily due to higher product margin across most product categories and continued focus on increasing efficiencies. As Norm stated, while we believe there are more opportunities to grow retail gross margin over time, we do not expect retail gross margin will improve year-over-year at the same pace and magnitude we have been experiencing over the last couple of years. The mix of sales from the higher margin furniture and mattress categories represented 36.3% of our second quarter of fiscal year 2019 retail product sales and 50% of our product gross profit. Retail SG&A dollars increased by 5.5% in the second quarter versus the same quarter in the prior fiscal year, while retail SG&A expense as a percentage of revenue de-leveraged 50 basis points to 28% primarily due to higher labor and store occupancy cost for new stores and an increase in the corporate overhead allocation. Turning now to our credit segment, finance charges and other revenues were a quarterly record of $88.2 million for the second quarter of fiscal year 2019, up 10.1% from the same period last year. The increase versus last year was due to a record yield of 21.3%, an increase of 260 basis points from last year partially offset by 27% decline in insurance commissions. As expected, insurance income declined over the prior year period primarily due to the decrease in retrospective commissions as a result of higher claim volumes related to Hurricane Harvey. It will continue to take several quarters of lower claim performance until we benefit from retrospective insurance commissions. SG&A expense in the credit segment for the second quarter increased 14.3% versus the same quarter last fiscal year. And on an annualized basis, as a percentage of the average customer portfolio balance was 10.1% compared to 8.9%. The increase in credit SG&A expense primarily reflects the investments we are making to pursue our compelling recovery opportunity, an increase in compensation costs and an increase in the corporate overhead allocation. Provision for bad debts in the credit segment was $50.5 million for the second quarter of fiscal year 2019, an increase of $1.2 million in the same period last year. The change reflects a greater decrease in the allowance for bad debts during the second quarter of fiscal year 2018 compared to the second quarter of fiscal year 2019, partially offset by year-over-year reduction in net charge-offs of $3 million. The bad debt allowance as a percent of the total portfolio at July 31, 2018, was 13.5% compared to 13.7% at July 31, 2017. Interest expense for the second quarter was $15.6 million, which was a decrease of $4.5 million or 22.3% from the same period last year. This is the sixth consecutive quarter where our interest expense has declined sequentially and the lowest quarterly interest expense in the past 12 quarters as a result of continued de-leveraging and reductions in all-in cost of funds. For the second quarter annualized interest expense as a percentage of average portfolio balance was 4.2% compared to 5.4% for the same period last year. Average net debt as a percentage of average portfolio balance was approximately 62% compared to approximately 72% for the same period a year ago. We continued to make progress on de-leveraging our balance sheet, diversifying our sources of capital and reducing are all-in cost of funds. During the second quarter by utilizing our warehouse facility, we redeemed our outstanding 2017-A Class B and C notes which will help to further reduce our cost of funds. I am extremely pleased by the terms investor demand and pricing of our recent 2018-A securitization which we completed on August 15 despite an approximately 80 basis point increase in the benchmark rate since our last ABS transaction the all-in cost of funds only increased by 17 basis points when compared to our previous ABS transaction. ABS notes currently outstanding include all classes of our 2017-B and 2018-A notes. With the recent success of our ABL renewal and continued de-leveraging we do not expect to complete another ABS transaction during the current fiscal year. Our capital position continues to improve and we remain focused on de-leveraging our balance sheet, diversifying our sources of capital and proactively reducing our interest expense. With this overview, I will turn the call back over to Norm to conclude our prepared remarks.

Thanks Lee. We are extremely excited about the direction we are headed and our strong second quarter results demonstrates the growing momentum in our business. With that, operator, please open the call up to questions.

Thank you. We will now be conducting question-and-answer session. [Operator Instructions] Our first question comes from the line of John Baugh with Stifel. Please proceed with your question.

Thank you. Good morning and congratulations on a stronger earnings quarter here.

Good morning John.

Let’s see a few things, could you first on the Progressive commentary would you deem less than estimated performance are completely on internal execution on Conn’s part or has there been anything that’s changed from the Progressive side as related to LTL?

Hey John, nothing has changed from the Progressive side of the house. It’s completely internal execution piece on our part.

Okay. And I think you mentioned you have already seen some execution improvement there or did I hear that wrong, what precisely is the plan, what are you doing there?

Yes. What we did say in the script was we are confident that third quarter will get back about where we were in the second quarter. And it’s really about as I talked about in the script John it’s about people and executing on the process within the stores. I have shared previously we get 600,000 declines annually within our store. There are more than ample opportunities for us to be able to capture that 10% balance of sale – that’s the matter. And by the way we have districts that are very, very close to that 10% balance of sale as we sit here today. It’s just a matter of us executing on a consistent basis and reducing that variability from our top districts to our bottom districts.

Good. Switching gears a little bit, so your gross margin in retail was outstanding and yet the categories that I think historically have had lower gross margins, performed better and vice-versa. So I guess I am trying to understand how that occurred, I understand you want to lift mattress and furniture sales from where they sit and maybe you could go into the execution things there, you touched on a little bit more color, but I am particularly interested in how the margin came out – to where it came out given that shift?

Well, certainly, a few things John. Obviously, mattress and furniture are our highest margin categories, but with the merchandising team and the effort to the other categories as I mentioned in the script on the home office side as we refresh that category, we were able to increase margins as we increased the number of SKUs and move that entire category to more aligned with our better and best strategies. So we have seen improved margins in that category. And as we have added gaming, for example, that category or that product is accretive to the electronics category margin as well. So, both of those things and we continue even within furniture and mattress, although the sales were down, the margins because of efforts we are doing with the products within those categories, we are seeing improvements in the margins there.

Okay. And then quickly has there been any changes within your credit strategy in terms of approval rates or down payments or are you getting a looser or tighter, anywhere and any changes?

Hey, John, it’s Lee. No, look as we have always discussed, we are always focused on ensuring that we maintain the risk level that we are comfortable taking. So I wouldn’t say there is any – we have never used the word loosening at all, we are tightening, we are just focused on maintaining the same risk levels based upon how our model is working with JD, etcetera, so really there is no change at all.

We take the opportunity, John, on a regular basis depending on how the portfolio is performing in different segments be it geographies, be it new customers, existing customers, where we will adjust tightening and/or taking a little bit more opportunity if the performances there that warrants that enables us to continue to feel comfortable that we are delivering that 1000 plus basis points spread.

Great. Thanks. I will defer to others. Good luck.

Thanks, John.

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning Norm and Lee and let me congratulate you as well on a strong quarter here.

Thanks Brad.

Couple of questions if I could. Maybe first starting with same-store sales, clearly you all are continuing to make progress there, a lot of moving pieces year-over-year and a lot of initiatives. I guess my first question would be of all you have in place here in terms of merchandising in terms of the funnel that you are working on what if anything he is starting to see some real promise from and what are you most excited about as you think about the next couple quarters ahead here?

Well, as we talked about Brad in the script and we tried to lay out on the home office category, the refresh of that category for the merchandising group, I would tell you we believe speaks of what the opportunity is and we turn that category around and have had 9 consecutive months now of positive same-store sales. We believe we have that opportunity to refresh major furniture subcategories of upholstery, dining and bedroom that will give us significant opportunities in the future. On the electronics side, the adding of the new products to gaming, because of that we were able to create – have that category, the positive same-store sales, if we had not that product we would have been slightly negative same-store sales in that category. And then the third piece would be retail execution, when you look at the variability that we have across our districts, very confident that we can improve there that will materially impact our performance from the same-store sales standpoint. And it’s not about we are always going to have bottom districts and top district, it’s about reducing the range of variability from a performance standpoint that exists, especially when it’s driven not by macro factors, but it’s being driven by retail execution.

Great. And then obviously 3Q an unusual quarterly that you are up against the Harvey comparison I appreciate all the color from a guidance perspective and how you are thinking about those markets, can you give us any color on how things have been quarter-to-date and how Labor Day weekend was for you?

We don’t give out inter-quarter stuff as you know Brad, but I will tell you we feel confident with what we guided to from a range on both the Harvey and the non-Harvey that our range is appropriate with what we have laid out.

Great. And then as we think about the fourth quarter, do you think there is a similar magnitude of the headwind or how should we think about the Harvey comparison as we fine tune our estimates for the fourth quarter?

Yes. I would say directionally at least although we haven’t obviously given fourth quarter guidance, the impact from a sales standpoint in the Harvey market will be comparable to what we are estimating in the third quarter.

Okay, great. And if I can just squeeze one more kind of high level question for how to think about modeling 2019 and clearly you all have made a great deal of progress on the credit side of the business now accelerating store openings, when we think about the growth rate of SG&A dollars next year versus this year, do you think Lee that you guys will be growing SG&A dollars more in ‘19 than in 2018 given that you have these 10 to 15 stores coming or are you lapping other expenditures that there maybe the growth rate of dollars is similar?

Yes. There is no question due to the new store openings there are dollars. Due to that we will be up obviously I talked about on the call we do have increased corporate allocation falling through and that’s due to increased stock comp and accrued compensation. So as we lap that there may be a slowdown from that perspective.

Great. Thank you so much here and keep up the great work.

Thanks Brad.

Our next question comes from the line of Brian Nagel with Oppenheimer & Company. Please proceed with your question.

Hi, good morning.

Hey, good morning Brian.

Congrats on a nice quarter, definitely some positive indicators here.

Thanks.

Thanks Brian.

So, I have a couple of questions, I want to focus on the retail side of the business, first off, Norm in your prepared comments you talked about the divergence performance between your top and bottom performing stores, I want to just maybe dive a little bit deeper into that, is that – is there – when you look at those cohorts is there a geographic influence there, was it simply store by store. And if you look at the data, has the divergence grown more recently or has this been in place for a while?

For the first part of your questions, Brian, it is not geographic in nature nor is it new or existing markets which is why I mean it cuts across all. We have top-performing, the new markets in similar geographies close to one another as well as less performing markets or districts close to it. So it’s what gives us great confidence that it is an execution issue. And again as I have mentioned this is an – we are always going to have top and bottom as you all know Brian. It’s about what that range is from a variability standpoint and narrowing that range. And our belief is and my strong belief is that we have the opportunity to narrow that range significantly. Now what I will tell you is we have actually seen some improvement in that and that variability in the recent months, but still from our perspective it’s too great of level of variability for me to be comfortable with.

Got it. Thank you. And then the second question I had, also on sales, so you – we have started to see retail sales improve, how much of a factor of it is pricing, as we think about the drivers of sales going forward, so I look at your results you have got this really nice trajectory in gross margins that very much persisted through fiscal Q2, when you look at the category data. And I understand that some of this is simply driven by those categories, but what we are seeing there is a trend there where it’s weaker unit sales higher prices. So I guess the question I have is as we look forward and then you pull your leverage to drive better sales, is pricing part of that discussion, is there some discussion may be you have to be more sharper on pricing lower prices in order to drive better sales?

It’s certainly not, Brian. I mean, what we really look at and when we measured is gross margin dollars. I would trade pricing everyday of the week to get increase from a gross margin dollar standpoint, especially with the condition of where our margins are at. As you well know, Brian, our core customer at least, they don’t have options and we are competitive from a pricing standpoint with the products we have not taking pricing and in our different categories. Now what I will tell you is as we have gone into, for example, into gaming or added new products, we are conscious of what products we are bringing in and what margin is associated with that wherever possible make it accretive to the category overall, but we don’t have compared to traditional retailers, the same dynamic of price to margin that you see trade-off with our core customer.

Got it. Thank you very much. Congrats. Best of luck.

Thanks, Brian.

Our next question comes from the line of Rick Nelson with Stephens. Please proceed with your question.

Good morning. I would like to follow-up on that gross margin question. Looking at the appliance category specifically where there was flat growth, but that category comprised of bigger part of your gross profit, you have had mix shift of some sort what exactly was driving that?

It’s really not mix shift per se. Rick, a couple of things have happened there. It’s really being driven by the tariffs with the implementation specifically in the laundry side of the house, but there is a little bit on the refrigeration side as well. And actually earlier this year when the tariffs were pending where possible we actually from a purchasing standpoint did a number of purchases at the lower cost price that we are realizing those benefits today, because we anticipated the tariffs being put in place, so that was an element of it and frankly we are estimating appliances for the quarter to cost us somewhere around 100 to 120 basis point same-store sales, because even though we had the higher ASP, higher margin, the units were down because of the fact that pricing in that whole laundry category is up year-over-year and we are seeing that not only within our business, but you are seeing that across the industry.

Thanks for that color, Norm. Also as we think about same-store sales to back half of the year, obviously, you’ve got lack of hurricanes, but any other puts or takes and I know in the past you have talked about immigration concerns. Do you think we have fully lapped that or is that a continuing headwind?

Yes, we have lapped, Rick. We are not seeing any degradation there from an immigration standpoint from where we saw a year ago. We are from an appliance standpoint do expect with the tariffs to continue to see pressure from the unit standpoint within laundry and on the refrigeration side. Again as I mentioned, we estimated in the third quarter that to be 100 to 120 basis points impact. We expect that continue in the fourth quarter. And that is the primary element other than lease-to-own opportunities that we have and then retail execution.

Thanks. Finally, if I could ask you, with store growth now ramping, looks like the upper end of the guidance range that you have previously reported and more stores coming next year. Any early learnings and anything you can share on your expectations for the economics of these new stores?

Hey, Rick, it’s Lee. Look, we have been extremely pleased with our new stores out of the gate and want to think that we are very excited about as we have talked about previously is with our new stores we are doing those only in existing state, using a cluster strategy enabling us to leverage existing infrastructure and get the appropriate efficiency that we are advertising etcetera. So, we are excited to be back into growth mode and again we will post guys as we go forward in that.

Okay. And are those stores expected to be dilutive initially and then start to contribute to your earnings growth, how do you see that unfolding?

Little bit dilutive at first, but as you know the power of our model allows us to have the very short EBITDA payback and we don’t expect anything different as we go forward.

I mean, even with our slower growth we still see less than 12 months EBITDA payback.

Thanks and good luck.

Thanks, Rick.

Thanks, Rick.

Our next question comes from the line of Bill Ryan with Compass Point. Please proceed with your question.

Thanks and good morning. Couple of questions. First, what is the look-back period for determining the retrospective commissions? And second, you mentioned on the call that I believe your leverage against the portfolio is 62% that’s obviously been coming down. Is there a target level that you think that, that might approach before you may use some incremental cash flow towards other areas for the shareholders? And then lastly in relation to the appliance category, you did mention that there was some benefit to the margin on the appliance category by buying before the tariffs hit? Is that probably going to reverse out a little bit going into Q3 as well? Thanks.

Bill, it’s Lee. Let me take your first question on the retrospective commission. So, again, it really is a full bucket, so any losses that we incurred do offset our ability to claim those retrospective commissions. So, there really isn’t a time period where it cuts off. Again, it’s just a full netting of losses versus income. So hopefully that answers your question on that one.

Yes, thank you.

And then I guess I’ll go to the third question with regards to the appliances…

Yes, on the appliance side, you are right, we will into the latter part of the third quarter, we will lap some of the benefits that we got there on the pre-purchases we did from an appliance standpoint, so we will see some erosion by the fourth quarter that will be completely gone on the de-leveraging.

Yes. And then Bill on the de-leveraging question, we haven’t actually put out a publicly stated goal, but as we have said on the actual conference call, I would continue to be focused on continued de-leveraging again obviously as you know we are a company that has a core component, that’s our sub-prime financing and we want to make sure that we have a very stable and solid balance sheet that we just continue to de-leverage at this point. Okay, thank you.

Yes.

There are no further questions in the queue. I would like to hand the call back over to Norm Miller for closing comments.

Thank you. I want to take the opportunity to thank our 4,500 plus associates in the company for their hard work and their contribution. I also want to thank you for your interest in our company and we look forward to sharing our results with you next quarter. Have a good day.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.