XLY Consumer Discretionary Select SPDR Fund

I last wrote about appliance, electronics, and furniture retailer Conn's (CONN) as a Zacks #1 Rank Strong Buy in April after another solid quarterly report confirmed the growth that the Street was still underestimating.

Guess what? They did it again in early June and the stock has since made new all-time highs above $50. In fact, Conn's has consistently been a Zacks #1 Rank (Strong Buy), #2 (Buy), or #3 (Hold) since January 2011 when it was trading under $5!

Delivering consistent earnings beats -- averaging a 17.5% upside surprise for the past four quarters -- means the story is still rolling and has analysts scrambling to keep up.

Aren't Big-Boxes Just for "Show-rooming" These Days?

If you've watched the 3-year decline of "big box" appliance and electronics retailer Best Buy (BBY), you may have thought that this is a business model to stay away from. I certainly thought so until I discovered Conn's (CONN), a family-built retailer with over 55 stores in Texas, 6 in Louisiana, and newer footholds in Oklahoma City, Albuquerque, and Tucson.

Conn's roots go back to 1890 where it started life as a plumbing company in Beaumont, Texas. In 1934, Carroll Wayne Conn, Sr bought the company and within a few years began selling refrigerators and gas ranges. He didn't become the Sam Walton of appliances, but his legacy built a brand that Texans have come to know and trust.

Now they sell just about everything durable for the home, including entertainment electronics, furniture, mattresses and lawn and garden equipment -- and they've built a loyal customer base doing it with a focus on service and satisfaction. Bright, clean stores increase the appeal as well.

Sales and Profits Grow With Store Build-Out

Since coming public nearly a decade ago, Conn's has forged a steady expansion, with quarterly revenues averaging over $200 million for the past 5 years. The recent two quarters sales results both topped $250 million for the first time since 2008.

This sales growth is propelled by expansion with new locations built around their HomePlus store concept. Pricing power and margin improvement keep their earnings expanding as well, with mattresses and furniture a big contributor this year to double-digit same-store sales improvements.

Some analysts predict that the growth opportunity here for Conn's as they expand out of Texas to other regions of the country could see a quadrupling of its 70 stores over 10 years.

Does the Growth Story Warrant the Parabolic Price Move?

CONN the stock has had quite a run in the past year, moving from $15 to $55. And this has pushed the forward P/E to nearly 20X. To some investors, this chart might tell a story of the stock getting ahead of the earnings.

But with EPS growth of over 60% projected into fiscal year 2014 and over 30% for FY15, growth investors are willing to bank on a strong US consumer justifying the Conn's story.

Besides the square-footage growth of nearly 20% per year, same-store sales have been roaring on the back of an expansion into furniture and mattresses, product areas with substantially higher profit margins. Consensus estimates for FY15 of roughly $3.50 per share put the valuation multiple under 15X at $52.

If such a parabolic price run concerns you, I wouldn't blame you. The key is to buy it "on sale" during pullbacks as we did for the FTM portfolio in April in the low $40s. If the Conn's growth strategy and execution stay on course, this is probably a $60 stock by Christmas and a $70 stock by the holidays of 2014 as it begins to trade on the following year's 25% growth estimates.

Big Box Retail 101: Service and Financing

C.W. Conn, Jr. joined his father's company in 1953 after serving in the Korean War. He recognized that customers needed dependable, quality service and founded Conn's repair service and maintenance company, Appliance Parts and Service, in 1962. In 1964 he co-founded Conn Credit Corporation, a consumer credit company, to provide financing to Conn's customers for the purchase of products they needed for their homes.

Mr. Conn, Sr. and Mr. Conn, Jr. were dedicated to their customers and to the idea that consumers should receive value for the dollars they spent on the products they offered in their stores. Their dedication was so strong that they often directed their employees to seek out dissatisfied customers to find what the company could do to make them satisfied customers.

The flexible in-house credit options offered by Conn's allows them to capture more customers, sell higher margin product to consumers with less than perfect credit, and also control approval rates and credit limits. Obviously the company can also capture fees and interest on accounts that are performing. The credit area is also expected to provide strong growth as new stores gain new customers.

While giant competitor Best Buy trades at only 11X, if you want quality, organic growth that builds customer loyalty as a top priority in a very tough business space, consider Conn's on any pullbacks near $50 because it can probably support a high teens multiple in an expanding economy with a spirited housing market.

Kevin Cook is a Senior Stock Strategist with Zacks.com
 
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