| CONNS INC ITEM 1A RISK FACTORS |
| 17 ITEM 1A RISK FACTORS An investment in our common stock involves risks and uncertainties |
| You should consider carefully the following information about these risks and uncertainties before buying shares of our common stock |
| The occurrence of any of the risks described below could adversely affect our business, financial condition or results of operations |
| In that case, the trading price of our stock could decline, and you could lose all or part of the value of your investment |
| Our success depends substantially on our ability to open and operate profitably new stores in existing, adjacent and new geographic markets |
| We plan to continue our expansion by opening an additional six to eight new stores in fiscal 2007 |
| We anticipate these new stores to include additional stores in the Dallas/Fort Worth Metroplex, South Texas, where we currently have two stores, and possibly others in areas where we have not operated previously |
| We have not yet selected sites for all of the stores that we plan to open within the next fiscal year |
| Any of these circumstances could have a material adverse effect on our financial results |
| There are a number of factors that could affect our ability to open and operate new stores consistent with our business plan, including: o competition in existing, adjacent and new markets; o competitive conditions, consumer tastes and discretionary spending patterns in adjacent and new markets that are different from those in our existing markets; o a lack of consumer demand for our products at levels that can support new store growth; o limitations created by covenants and conditions under our credit facilities and our asset-backed securitization program; o the availability of additional financial resources; o the substantial outlay of financial resources required to open new stores and the possibility that we may recognize little or no related benefit; o an inability or unwillingness of vendors to supply product on a timely basis at competitive prices; o the failure to open enough stores in new markets to achieve a sufficient market presence; o the inability to identify suitable sites and to negotiate acceptable leases for these sites; o unfamiliarity with local real estate markets and demographics in adjacent and new markets; o problems in adapting our distribution and other operational and management systems to an expanded network of stores; o difficulties associated with the hiring, training and retention of additional skilled personnel, including store managers; and o higher costs for print, radio and television advertising |
| These factors may also affect the ability of any newly opened stores to achieve sales and profitability levels comparable with our existing stores or to become profitable at all |
| 17 If we are unable to manage our growing business, our revenues may not increase as anticipated, our cost of operations may rise and our profitability may decline |
| We face many business risks associated with growing companies, including the risk that our management, financial controls and information systems will be inadequate to support our planned expansion |
| Our growth plans will require management to expend significant time and effort and additional resources to ensure the continuing adequacy of our financial controls, operating procedures, information systems, product purchasing, warehousing and distribution systems and employee training programs |
| We cannot predict whether we will be able to manage effectively these increased demands or respond on a timely basis to the changing demands that our planned expansion will impose on our management, financial controls and information systems |
| If we fail to manage successfully the challenges our growth poses, do not continue to improve these systems and controls or encounter unexpected difficulties during our expansion, our business, financial condition, operating results or cash flows could be materially adversely affected |
| The inability to obtain funding for our credit operations through securitization facilities or other sources may adversely affect our business and expansion plans |
| We finance most of our customer receivables through asset-backed securitization facilities |
| The trust arrangement governing these facilities currently provides for two separate series of asset-backed notes that allow us to finance up to dlra450 million in customer receivables |
| Under each note series, we transfer customer receivables to a qualifying special purpose entity we formed for this purpose in exchange for cash, subordinated securities and the right to receive cash flows equal to the interest rate spread between the transferred receivables and the notes issued to third parties ( "e interest only strip "e ) |
| This qualifying special purpose entity, in turn, issues notes that are collateralized by these receivables and entitle the holders of the notes to participate in certain cash flows from these receivables |
| The Series A program is a dlra250 million variable funding note held by Three Pillars Funding Corporation, of which dlra185dtta0 million was drawn as of January 31, 2006 |
| The Series B program consists of dlra200 million in private bond placements that will require scheduled principal payments beginning in October 2006 |
| Our ability to raise additional capital through further securitization transactions, and to do so on economically favorable terms, depends in large part on factors that are beyond our control |
| These factors include: o conditions in the securities and finance markets generally; o conditions in the markets for securitized instruments; o the credit quality and performance of our customer receivables; o our ability to obtain financial support for required credit enhancement; o our ability to service adequately our financial instruments; o the absence of any material downgrading or withdrawal of ratings given to our securities previously issued in securitizations; and o prevailing interest rates |
| Our ability to finance customer receivables under our current asset-backed securitization facilities depends on our compliance with covenants relating to our business and our customer receivables |
| If these programs reach their capacity or otherwise become unavailable, and we are unable to arrange substitute securitization facilities or other sources of financing, we may have to limit the amount of credit that we make available through our customer finance programs |
| This may adversely affect revenues and results of operations |
| Further, our inability to obtain funding through securitization facilities or other sources may adversely affect the profitability of outstanding accounts under our credit programs if existing customers fail to repay outstanding credit due to our refusal to grant additional credit |
| Since our cost of funds under our bank credit facility is expected to be greater in future years than our cost of funds under our current securitization facility, increased reliance on our bank credit facility may adversely affect our net income |
| 18 An increase in interest rates may adversely affect our profitability |
| The interest rates on our bank credit facility and the Series A program under our asset-backed securitization facility fluctuate up or down based upon the LIBO/LIBOR rate, the prime rate of our administrative agent or the federal funds rate in the case of the bank credit facility and the commercial paper rate in the case of the Series A program |
| To the extent that such rates increase, the fair value of the interest only strip will decline and our interest expense could increase which may result in a decrease in our profitability |
| We have significant future capital needs which we may be unable to fund, and we may need additional funding sooner than currently anticipated |
| We will need substantial capital to finance our expansion plans, including funds for capital expenditures, pre-opening costs and initial operating losses related to new store openings |
| We may not be able to obtain additional financing on acceptable terms |
| If adequate funds are not available, we will have to curtail projected growth, which could materially adversely affect our business, financial condition, operating results or cash flows |
| We estimate that capital expenditures during fiscal 2007 will be approximately dlra25 million to dlra30 million and that capital expenditures during future years may exceed this amount |
| We expect that cash provided by operating activities, available borrowings under our credit facility, and access to the unfunded portion of our asset-backed securitization program will be sufficient to fund our operations, store expansion and updating activities and capital expenditure programs through at least January 31, 2007 |
| We may be required to seek additional capital earlier than anticipated if future cash flows from operations fail to meet our expectations and costs or capital expenditures related to new store openings exceed anticipated amounts |
| A decrease in our credit sales could lead to a decrease in our product sales and profitability |
| In the last three years, we financed, on average, approximately 57prca of our retail sales through our internal credit programs |
| Our ability to provide credit as a financing alternative for our customers depends on many factors, including the quality of our accounts receivable portfolio |
| Payments on some of our credit accounts become delinquent from time to time, and some accounts end up in default, due to several factors, including general and local economic conditions |
| As we expand into new markets, we will obtain new credit accounts that may present a higher risk than our existing credit accounts since new credit customers do not have an established credit history with us |
| A general decline in the quality of our accounts receivable portfolio could lead to a reduction of available credit provided through our finance operations |
| As a result, we might sell fewer products, which could adversely affect our earnings |
| Further, because approximately 58prca of our credit customers make their credit account payments in our stores, any decrease in credit sales could reduce traffic in our stores and lower our revenues |
| A decline in the credit quality of our credit accounts could also cause an increase in our credit losses, which could result in a decrease in our securitization income or increase the provision for bad debts on our statement of operations and result in an adverse effect on our earnings |
| A decline in credit quality could also lead to stricter underwriting criteria which might have a negative impact on sales |
| A downturn in the economy may affect consumer purchases of discretionary items, which could reduce our net sales |
| A large portion of our sales represent discretionary spending by our customers |
| Many factors affect discretionary spending, including world events, war, conditions in financial markets, general business conditions, interest rates, inflation, energy and gasoline prices, consumer debt levels, the availability of consumer credit, taxation, unemployment trends and other matters that influence consumer confidence and spending |
| Our customers &apos purchases of discretionary items, including our products, could decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions |
| If this occurs, our net sales and profitability could decline |
| 19 We face significant competition from national, regional and local retailers of major home appliances and consumer electronics |
| The retail market for major home appliances and consumer electronics is highly fragmented and intensely competitive |
| We currently compete against a diverse group of retailers, including national mass merchants such as Sears, Wal-Mart, Target, Samapstas Club and Costco, specialized national retailers such as Circuit City and Best Buy, home improvement stores such as Loweapstas and Home Depot, and locally-owned regional or independent retail specialty stores that sell major home appliances and consumer electronics similar, and often identical, to those we sell |
| We also compete with retailers that market products through store catalogs and the Internet |
| In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time |
| We may not be able to compete successfully against existing and future competitors |
| Some of our competitors have financial resources that are substantially greater than ours and may be able to purchase inventory at lower costs and better sustain economic downturns |
| Our competitors may respond more quickly to new or emerging technologies and may have greater resources to devote to promotion and sale of products and services |
| If two or more competitors consolidate their businesses or enter into strategic partnerships, they may be able to compete more effectively against us |
| Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including: o expansion by our existing competitors or entry by new competitors into markets where we currently operate; o lower pricing; o aggressive advertising and marketing; o extension of credit to customers on terms more favorable than we offer; o larger store size, which may result in greater operational efficiencies, or innovative store formats; and o adoption of improved retail sales methods |
| Competition from any of these sources could cause us to lose market share, revenues and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations |
| If new products are not introduced or consumers do not accept new products, our sales may decline |
| Our ability to maintain and increase revenues depends to a large extent on the periodic introduction and availability of new products and technologies |
| We believe that the introduction and continued growth in consumer acceptance of new products, such as digital video recorders and digital, high-definition televisions, will have a significant impact on our ability to increase revenues |
| These products are subject to significant technological changes and pricing limitations and are subject to the actions and cooperation of third parties, such as movie distributors and television and radio broadcasters, all of which could affect the success of these and other new consumer electronics technologies |
| It is possible that new products will never achieve widespread consumer acceptance |
| If we fail to anticipate changes in consumer preferences, our sales may decline |
| Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change |
| Our success depends upon our ability to anticipate and respond in a timely manner to trends in consumer preferences relating to major household appliances and consumer electronics |
| If we fail to identify and respond to these changes, our sales of these products may decline |
| In addition, we often make commitments to purchase products from our vendors up to six months in advance of proposed delivery dates |
| Significant deviation from the projected demand for products that we sell may have a material adverse effect on our results of operations and financial condition, either from lost sales or lower margins due to the need to reduce prices to dispose of excess inventory |
| 20 A disruption in our relationships with, or in the operations of, any of our key suppliers could cause our sales to decline |
| The success of our business and growth strategies depends to a significant degree on our relationships with our suppliers, particularly our brand name suppliers such as General Electric, Whirlpool, Frigidaire, Maytag, LG, Mitsubishi, Sony, Hitachi, Samsung, Toshiba, Serta, Hewlett Packard and Compaq |
| We do not have long term supply agreements or exclusive arrangements with the majority of our vendors |
| We typically order our inventory through the issuance of individual purchase orders to vendors |
| We also rely on our suppliers for cooperative advertising support |
| We may be subject to rationing by suppliers with respect to a number of limited distribution items |
| In addition, we rely heavily on a relatively small number of suppliers |
| Our top six suppliers represented 60dtta6prca of our purchases for fiscal 2006, and the top two suppliers represented approximately 29dtta2prca of our total purchases |
| The loss of any one or more of these key vendors or our failure to establish and maintain relationships with these and other vendors could have a material adverse effect on our results of operations and financial condition |
| Our ability to enter new markets successfully depends, to a significant extent, on the willingness and ability of our vendors to supply merchandise to additional warehouses or stores |
| If vendors are unwilling or unable to supply some or all of their products to us at acceptable prices in one or more markets, our results of operations and financial condition could be materially adversely affected |
| Furthermore, we rely on credit from vendors to purchase our products |
| As of January 31, 2006, we had dlra40dtta9 million in accounts payable and dlra74dtta0 million in merchandise inventories |
| A substantial change in credit terms from vendors or vendors &apos willingness to extend credit to us would reduce our ability to obtain the merchandise that we sell, which could have a material adverse effect on our sales and results of operations |
| You should not rely on our comparable store sales as an indication of our future results of operations because they fluctuate significantly |
| Our historical same store sales growth figures have fluctuated significantly from quarter to quarter |
| For example, same store sales growth for each of the quarters of fiscal 2006 were 7dtta3prca, 12dtta1prca, 23dtta3prca, and 22dtta6prca, respectively |
| Even though we achieved double-digit same store sales growth during fiscal 2006, we may not be able to increase same store sales at this pace in the future |
| A number of factors have historically affected, and will continue to affect, our comparable store sales results, including: o changes in competition; o general economic conditions; o new product introductions; o consumer trends; o changes in our merchandise mix; o changes in the relative sales price points of our major product categories; o the impact of our new stores on our existing stores, including potential decreases in existing stores &apos sales as a result of opening new stores; o weather conditions in our markets; o timing of promotional events; o timing and location of major sporting events; and o our ability to execute our business strategy effectively |
| 21 Changes in our quarterly and annual comparable store sales results could cause the price of our common stock to fluctuate significantly |
| Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate, which could adversely affect our common stock price |
| We experience seasonal fluctuations in our net sales and operating results |
| We also incur significant additional expenses during this fiscal quarter due to higher purchase volumes and increased staffing |
| If we miscalculate the demand for our products generally or for our product mix during the fiscal quarter ending January 31, our net sales could decline, resulting in excess inventory, which could harm our financial performance |
| A shortfall in expected net sales, combined with our significant additional expenses during this fiscal quarter, could cause a significant decline in our operating results |
| This could adversely affect our common stock price |
| Our business could be adversely affected by changes in consumer protection laws and regulations |
| Federal and state consumer protection laws and regulations, such as the Fair Credit Reporting Act, limit the manner in which we may offer and extend credit |
| Since we finance a substantial portion of our sales, any adverse change in the regulation of consumer credit could adversely affect our total revenues and gross margins |
| For example, new laws or regulations could limit the amount of interest or fees that may be charged on consumer loan accounts or restrict our ability to collect on account balances, which would have a material adverse effect on our earnings |
| Compliance with existing and future laws or regulations could require us to make material expenditures, in particular personnel training costs, or otherwise adversely affect our business or financial results |
| Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional licensing expenses, any of which could have an adverse effect on our results of operations and stock price |
| Pending litigation relating to the sale of credit insurance and the sale of service maintenance agreements in the retail industry, including one lawsuit in which we were the defendant, could adversely affect our business |
| We understand that states &apos attorneys general and private plaintiffs have filed lawsuits against other retailers relating to improper practices conducted in connection with the sale of credit insurance in several jurisdictions around the country |
| We offer credit insurance in all of our stores and require the purchase of property credit insurance products from us or from third party providers in connection with sales of merchandise on installment credit; therefore, similar litigation could be brought against us |
| We were previously named as a defendant in a purported class action lawsuit alleging breach of contract and violations of state and federal consumer protection laws arising from the terms of our service maintenance agreements |
| A final judgment was entered dismissing that lawsuit |
| While we believe we are in full compliance with applicable laws and regulations, if we are found liable in any future lawsuit regarding credit insurance or service maintenance agreements, we could be required to pay substantial damages or incur substantial costs as part of an out-of-court settlement, either of which could have a material adverse effect on our results of operations and stock price |
| An adverse judgment or any negative publicity associated with our service maintenance agreements or any potential credit insurance litigation could also affect our reputation, which could have a negative impact on sales |
| If we lose key management or are unable to attract and retain the highly qualified sales personnel required for our business, our operating results could suffer |
| Our future success depends to a significant degree on the skills, experience and continued service of Thomas J Frank, Sr, our Chairman of the Board and Chief Executive Officer, William C Nylin, Jr, our President and Chief Operating Officer, David L Rogers, our Chief Financial Officer, David R Atnip, our Senior Vice President and Treasurer, Sydney K Boone, our Secretary and General Counsel, and other key personnel |
| If we lose the services of any of these individuals, or if one or more of them or other key personnel decide to join a competitor or otherwise compete directly or indirectly with us, our business and operations could be harmed, and we could have difficulty in 22 implementing our strategy In addition, as our business grows, we will need to locate, hire and retain additional qualified sales personnel in a timely manner and develop, train and manage an increasing number of management level sales associates and other employees |
| Competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees, and increases in the federal minimum wage or other employee benefits costs could increase our operating expenses |
| If we are unable to attract and retain personnel as needed in the future, our net sales growth and operating results could suffer |
| Because our stores are located in Texas and Louisiana, we are subject to regional risks |
| Our 56 stores are located exclusively in Texas and Louisiana |
| This subjects us to regional risks, such as the economy, weather conditions, hurricanes and other natural disasters |
| If the region suffered an economic downturn or other adverse regional event, there could be an adverse impact on our net sales and profitability and our ability to implement our planned expansion program |
| Several of our competitors operate stores across the United States and thus are not as vulnerable to the risks of operating in one region |
| Our information technology infrastructure is vulnerable to damage that could harm our business |
| Our ability to operate our business from day to day, in particular our ability to manage our credit operations and inventory levels, largely depends on the efficient operation of our computer hardware and software systems |
| We use management information systems to track inventory information at the store level, communicate customer information, aggregate daily sales information and manage our credit portfolio |
| These systems and our operations are vulnerable to damage or interruption from: o power loss, computer systems failures and Internet, telecommunications or data network failures; o operator negligence or improper operation by, or supervision of, employees; o physical and electronic loss of data or security breaches, misappropriation and similar events; o computer viruses; o intentional acts of vandalism and similar events; and o hurricanes, fires, floods and other natural disasters |
| Any failure due to any of these causes, if it is not supported by our disaster recovery plan, could cause an interruption in our operations and result in reduced net sales and profitability |
| If we are unable to maintain our current insurance coverage for our service maintenance agreements, our customers could incur additional costs and our repair expenses could increase, which could adversely affect our financial condition and results of operations |
| There are a limited number of insurance carriers that provide coverage for our service maintenance agreements |
| If insurance becomes unavailable from our current carriers for any reason, we may be unable to provide replacement coverage on the same terms, if at all |
| Even if we are able to obtain replacement coverage, higher premiums could have an adverse impact on our profitability if we are unable to pass along the increased cost of such coverage to our customers |
| Inability to obtain insurance coverage for our service maintenance agreements could cause fluctuations in our repair expenses and greater volatility of earnings |
| 23 If we are unable to maintain group credit insurance policies from insurance carriers, which allow us to offer their credit insurance products to our customers purchasing on credit, our revenues could be reduced and bad debts might increase |
| If credit insurance becomes unavailable for any reason we may be unable to offer replacement coverage on the same terms, if at all |
| Even if we are able to obtain replacement coverage, it may be at higher rates or reduced coverage, which could affect the customer acceptance of these products, reduce our revenues or increase our credit losses |
| Changes in trade regulations, currency fluctuations and other factors beyond our control could affect our business |
| A significant portion of our inventory is manufactured overseas and in Mexico |
| Changes in trade regulations, currency fluctuations or other factors beyond our control may increase the cost of items we purchase or create shortages of these items, which in turn could have a material adverse effect on our results of operations and financial condition |
| Conversely, significant reductions in the cost of these items in US dollars may cause a significant reduction in the retail prices of those products, resulting in a material adverse effect on our sales, margins or competitive position |
| In addition, commissions earned on both our credit insurance and service maintenance agreement products could be adversely affected by changes in statutory premium rates, commission rates, adverse claims experience and other factors |
| We may be unable to protect our intellectual property rights, which could impair our name and reputation |
| We believe that our success and ability to compete depends in part on consumer identification of the name "e Connapstas "e |
| We have registered the trademarks "e Connapstas "e and our logo |
| We intend to protect vigorously our trademark against infringement or misappropriation by others |
| A third party, however, could attempt to misappropriate our intellectual property in the future |
| The enforcement of our proprietary rights through litigation could result in substantial costs to us that could have a material adverse effect on our financial condition or results of operations |
| Any changes in the tax laws of the states of Texas and Louisiana could affect our state tax liabilities |
| From time to time, legislation has been introduced in the Texas legislature that would, among other things, remove the current exemption from franchise tax liability that limited partnerships enjoy |
| Currently, the Texas Legislature is not in session and its next regular session is scheduled to begin in January 2007; however, the Texas Governor has announced he will call a special session of the Texas Legislature beginning April 17, 2006 to address school finance reform mandated by the Texas Supreme Court |
| Legislation could be introduced that, among other things, could change the way that limited partnerships are taxed in the state of Texas; however, the outcome of any particular proposal cannot be predicted with any certainty |
| A further rise in oil and gasoline prices could affect our customers &apos determination to drive to our stores, and cause us to raise our delivery charges |
| A further significant increase in oil and gasoline prices could adversely affect our customers &apos shopping decisions and patterns |
| We rely heavily on our internal distribution system and our same or next day delivery policy to satisfy our customers &apos needs and desires, and any such significant increases could result in increased distribution charges |
| Such increases may not significantly affect our competitors |