CONN'S, INC. Overview
We continue to monitor the evolving nature of COVID-19 and respond to its impact on our business. We have experienced and continue to experience challenges related to the pandemic. These challenges have increased the complexity of our business and impacted our supply chain and sales for fiscal year 2022 and we expect it to continue into fiscal year 2023. Increased complexity, supply chain issues and reduced sales will likely continue until the effects of COVID-19 diminish. The full impact of COVID-19 remains uncertain and will depend on future developments, including the origination, transmissibility and severity of new variants, if any, and any related actions taken by federal, state and local government officials to prevent and manage disease spread, all of which are uncertain and unpredictable. This section provides a discussion of our historical financial condition, cash flows and results of operations for the periods indicated herein. We encourage you to read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and related notes included herein and the discussion in Item 1. Business of this annual report on Form 10-K. This discussion contains forward-looking statements that involve numerous risks and uncertainties. The forward-looking statements are subject to a number of important factors, including those factors discussed in Item 1A. Risk Factors and Part I Forward-Looking Statements that could cause actual results to differ materially from the results described or implied by such forward-looking statements. Discussion and analysis of matters pertaining to the year endedJanuary 31, 2020 and year-to-year comparisons between the years endedJanuary 31, 2021 and 2020 are not included in this Form 10-K, but can be found under Part II, Item 7 of our annual report on Form 10-K for the year endedJanuary 31, 2021 that was filed onMarch 31, 2021 .
Our fiscal year ends on
Executive Summary
Total revenues were$1.59 billion for fiscal year 2022 compared to$1.39 billion for fiscal year 2021, an increase of$204.0 million or 14.7%. Retail revenues were$1.31 billion for fiscal year 2022 compared to$1.07 billion for fiscal year 2021, an increase of$241.2 million or 22.7%. The increase in retail revenue was primarily driven by an increase in same store sales of 15.3%, an increase in RSA commissions and new store sales growth with the addition of 12 new stores. The increase in same store sales reflects an increase in demand across most of the Company's home-related product categories. The increase also reflects the impact of fiscal year 2021 proactive underwriting changes, reductions in store hours and state mandated stay-at-home orders, each of which was the result of the COVID-19 pandemic. Credit revenues were$283.7 million for the fiscal year 36 -------------------------------------------------------------------------------- Table of Contents 2022 compared to$320.9 million for fiscal year 2021, a decrease of$37.2 million or 11.6%. The decrease in credit revenue was primarily due to a decrease of 18.6% in the average outstanding balance of the customer accounts receivable portfolio. The decrease was partially offset by an increase in our insurance commissions as well as an increase in our yield rate. The yield rate for the year endedJanuary 31, 2022 was 22.8% compared to 21.7% for the year endedJanuary 31, 2021 . Retail gross margin for fiscal year 2022 was 36.7%, a decrease of 50 basis points from the 37.2% reported in fiscal year 2021. The year-over-year decrease in retail gross margin was primarily driven by an increase in product costs and a slower rate of growth in repair service agreement commissions and service revenues compared to the growth in product sales. This was partially offset by a shift in sales from lower margin products to higher margin products, lower financing fees and the impact of fixed logistics costs on higher sales. SG&A for fiscal year 2022 was$544.5 million compared to$478.8 million for fiscal year 2021, an increase of$65.7 million , or 13.7%, over the prior year. The SG&A increase in the retail segment was primarily due to increases in labor and occupancy costs related to new store growth and increases in variable expenses associated with same store sales growth, as well as increases in advertising and general operating costs. The SG&A increase for the credit segment was primarily due to an increase in the corporate overhead allocated to the credit segment due to an increase in labor costs which was partially offset by a decrease in allocated costs to the credit segment due to the lower average customer accounts receivable portfolio balance compared to the prior year. Provision for bad debts decreased to$48.2 million for the year endedJanuary 31, 2022 from$202.0 million for the year endedJanuary 31, 2021 , a decrease of$153.8 million . The year-over-year decrease was primarily driven by a greater decrease in the allowance for bad debts during the year endedJanuary 31, 2022 , compared to the decrease during the year endedJanuary 31, 2021 , and by a year-over-year decrease in net charge-offs of$100.9 million . The decrease in the allowance for bad debts for the year endedJanuary 31, 2022 was primarily driven by an improvement in the forecasted unemployment rate that drove a$31.5 million decrease in the economic reserve and a decline in the customer portfolio receivable balance, partially offset by an increase in loss rates. During the year endedJanuary 31, 2021 , the decrease in the allowance for bad debts was primarily driven by a decline in the customer accounts receivable portfolio partially offset by a$42.5 million increase in the economic reserve driven by an increase in forecasted unemployment rates stemming from the COVID-19 pandemic. Interest expense decreased to$25.8 million for fiscal year 2022 compared to$50.4 million for fiscal year 2021, a decrease of$24.6 million , or 48.9%. The decrease was driven by a lower average outstanding balance of debt and by a lower effective interest rate. Net income for fiscal year 2022 was$108.2 million , or$3.61 per diluted share, compared to net loss of$3.1 million , or$0.11 per diluted share, for fiscal year 2021.
How We Evaluate Our Operations
Senior management focuses on certain key indicators to monitor our performance including:
•Same store sales - Our management considers same store sales, which consists of both brick and mortar and e-commerce sales, to be an important indicator of our performance because they are important to our attempts to leverage our SG&A costs, which include rent and other store expenses, and they have a direct impact on our total net sales, net income, cash and working capital. Same store sales is calculated by comparing the reported sales for all stores that were open during both comparative fiscal years, starting in the first period in which the store has been open for a full quarter. Sales from closed stores, if any, are removed from each period. Sales from relocated stores have been included in each period as each such store was relocated within the same general geographic market. Sales from expanded stores have also been included in each period.
•Retail gross margin - Our management views retail gross margin as a key indicator of our performance because it reflects our pricing power relative to the prices we pay for our products. Retail gross margin is calculated by comparing retail total net sales to the cost of goods sold.
•60+ Day Delinquencies - Our management views customer account delinquencies as a key indicator of our performance because it is a reflection of the quality of our credit portfolio, it drives future credit performance and credit offerings, and it impacts the interest rates we pay on our asset-backed securitizations. Delinquencies are measured as the percentage of balances that are 60+ days past due. •Net Yield - Our management considers yield to be a key performance metric because it drives future credit decisions and credit offerings and directly impacts our net income. Yield reflects the amount of interest we receive from our portfolio. Company Initiatives
In fiscal year 2022, we grew retail sales by 22.7% reflecting the continued success of our strategic growth plan and our differentiated value proposition. We also achieved record eCommerce sales as we expanded our digital capabilities.
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In the credit segment, we maintained our focus on enhancing our credit platform to support the pursuit of our long-term growth objectives. Our credit segment continued to improve, reflecting the more sophisticated underwriting capabilities and strategy, improved collections and better execution on our financing transactions, which has led to lower cost of funds. We delivered the following financial and operational results in fiscal year 2022:
Fiscal Year 2022 Financial Highlights:
•Same store sales increased 15.3% for the fiscal year ended
•Strong same store sales combined with the contribution of new stores drove a 22.7% increase in total retail sales;
•eCommerce sales increased 171.3% to an annual record of
•Credit spread was 1,170 basis points, helping drive record credit segment
income before taxes of
•Net earnings increased to
•We repurchased 2,603,479 of shares, retiring approximately 8.8% of the
Company's outstanding shares as of
Outlook
As noted in the "Overview" above, our business and industry continue to be impacted by the COVID-19 pandemic inthe United States . Going forward, the full extent to which the pandemic will impact our supply chain, future business and operating results is uncertain. Government support, including the American Rescue Plan Act of 2021, theInfrastructure Investment and Jobs Act, and 2021 child tax credit payments, has provided our customers with additional financial means which we expect has helped our business. We feel we are well positioned to continue serving our customers and supporting our employees as we continue to monitor and respond to the pandemic. The broad appeal of our value proposition to our geographically diverse core demographic and the unit economics of our business should provide the stability necessary to maintain and grow our business. We expect our brand recognition and long history in our core markets to give us the opportunity to further penetrate our existing footprint, particularly as we leverage existing marketing spend, logistics infrastructure, and service footprint. There are also many markets in theU.S. with demographic characteristics similar to those in our existing footprint, which provides substantial opportunities for future growth. We plan to improve our operating results by leveraging our existing infrastructure and seeking to continually optimize the efficiency of our marketing, merchandising, distribution and credit operations. As we expand in existing markets and penetrate new markets, we expect to increase our purchase volumes, achieve distribution efficiencies and strengthen our relationships with our key vendors. Over time, we also expect our increased store base and the resulting higher net sales to further leverage our existing corporate and regional infrastructure. 38 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables present certain financial and other information, on a consolidated basis: Consolidated: Year Ended January 31, (in thousands) 2022 2021 Change Revenues: Total net sales$ 1,305,389 $ 1,064,311 $ 241,078 Finance charges and other revenues 284,642 321,714 (37,072) Total revenues 1,590,031 1,386,025 204,006 Costs and expenses: Cost of goods sold 825,987 668,315 157,672 Selling, general and administrative expense 544,490 478,767 65,723 Provision for bad debts 48,184 202,003 (153,819) Charges and credits 2,677 6,326 (3,649) Total costs and expenses 1,421,338 1,355,411 65,927 Operating income 168,693 30,614 138,079 Interest expense 25,758 50,381 (24,623) Loss (gain) on extinguishment of debt 1,218 (440) 1,658 Income (loss) before income taxes 141,717 (19,327) 161,044 Provision (benefit) for income taxes 33,512 (16,190) 49,702 Net income (loss)$ 108,205 $ (3,137) $ 111,342
Supplementary Operating Segment Information
Operating segments are defined as components of an enterprise that engage in
business activities and for which discrete financial information is available
that is evaluated on a regular basis by the chief operating decision maker to
make decisions about how to allocate resources and assess performance. We are a
leading specialty retailer and offer a broad selection of quality, branded
durable consumer goods and related services in addition to a proprietary credit
solution for our core consumers. We have two operating segments: (i) retail and
(ii) credit. Our operating segments complement one another. The retail segment
operates primarily through our stores and website and its product offerings
include furniture and mattresses, home appliances, consumer electronics and home
office products from leading global brands across a wide range of price points.
Our credit segment offers affordable financing solutions to a large,
under-served population of consumers who typically have limited credit
alternatives. Our operating segments provide customers the opportunity to
comparison shop across brands with confidence in our competitive prices as well
as affordable monthly payment options, next day delivery and installation in the
majority of our markets, and product repair service. We believe our large,
attractively merchandised retail stores and credit solutions offer a distinctive
value proposition compared to other retailers that target our core customer
demographic. The operating segments follow the same accounting policies used in
our consolidated financial statements.
We evaluate a segment's performance based upon operating income (loss). SG&A
includes the direct expenses of the retail and credit operations, allocated
corporate overhead expenses, and a charge to the credit segment to reimburse the
retail segment for expenses it incurs related to occupancy, personnel,
advertising and other direct costs of the retail segment which benefit the
credit operations by sourcing credit customers and collecting payments. The
reimbursement received by the retail segment from the credit segment is
calculated using an annual rate of 2.5% multiplied by the average outstanding
portfolio balance for each applicable period.
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The following table represents total revenues, costs and expenses, operating
income (loss) and income (loss) before taxes attributable to these operating
segments for the periods indicated:
Retail Segment: Year Ended January 31,
(dollars in thousands) 2022 2021 Change
Revenues:
Product sales $ 1,205,545 $ 973,031 $ 232,514
Repair service agreement commissions 89,101 78,838 10,263
Service revenues 10,743 12,442 (1,699)
Total net sales 1,305,389 1,064,311 241,078
Finance charges and other 949 816 133
Total revenues 1,306,338 1,065,127 241,211
Costs and expenses:
Cost of goods sold 825,987 668,315 157,672
Selling, general and administrative expense (1) 399,393 335,954 63,439
Provision for bad debts 479 443 36
Charges and credits 2,677 4,092 (1,415)
Total costs and expenses 1,228,536 1,008,804 219,732
Operating income $ 77,802 $ 56,323 $ 21,479
Number of stores:
Beginning of fiscal year 146 137
Opened 12 9
End of fiscal year 158 146
Credit Segment: Year Ended January 31,
(in thousands) 2022 2021 Change
Revenues:
Finance charges and other revenues $ 283,693 $ 320,898 $ (37,205)
Costs and expenses:
Selling, general and administrative expense (1) 145,097 142,813 2,284
Provision for bad debts 47,705 201,560 (153,855)
Charges and credits - 2,234 (2,234)
Total costs and expenses 192,802 346,607 (153,805)
Operating income (loss) 90,891 (25,709) 116,600
Interest expense 25,758 50,381 (24,623)
Loss (gain) on extinguishment of debt 1,218 (440) 1,658
Income (loss) before income taxes $ 63,915
(1)For the years ended
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Year ended January 31, 2022 compared to the year ended January 31, 2021
Revenues. The following table provides an analysis of retail net sales by
product category in each period, including repair service agreement commissions
and service revenues, expressed both in dollar amounts and as a percent of total
net sales:
Year Ended January 31, % Same Store
(dollars in thousands) 2022 % of Total 2021 % of Total Change Change % Change
Furniture and mattress $ 411,167 31.5 % $ 322,770 30.3 % $ 88,397 27.4 % 16.8 %
Home appliance 500,051 38.3 390,964 36.7 109,087 27.9 20.6
Consumer electronics 191,234 14.6 172,932 16.2 18,302 10.6 7.3
Home office 66,707 5.1 65,405 6.1 1,302 2.0 (4.7)
Other 36,386 2.8 20,960 2.0 15,426 73.6 66.0
Product sales 1,205,545 92.3 973,031 91.3 232,514 23.9 16.2
Repair service agreement
commissions (1) 89,101 6.8 78,838 7.4 10,263 13.0 6.0
Service revenues 10,743 0.9 12,442 1.3 (1,699) (13.7)
Total net sales $ 1,305,389 100.0 % $ 1,064,311 100.0 % $ 241,078 22.7 % 15.3 %
(1) The total change in sales of repair service agreement commissions includes
retrospective commissions, which are not reflected in the change in same store
sales.
The increase in product sales for the year ended January 31, 2022 was primarily
driven by an increase in same store sales of 15.3%, an increase in RSA
commissions and new store sales growth through the opening of 12 stores. The
increase in same store sales reflects an increase in demand across most of the
Company's home-related product categories. The increase also reflects the impact
of fiscal year 2021 proactive underwriting changes, reductions in store hours
and state mandated stay-at-home orders, each of which was the result of the
COVID-19 pandemic.
The following table provides the change of the components of finance charges and
other revenues:
Year Ended January 31,
(in thousands) 2022 2021 Change
Interest income and fees $ 259,422 $ 303,209 $ (43,787)
Insurance income 24,270 17,689 6,581
Other revenues 950 816 134
Finance charges and other revenues
The decrease in finance charges and other revenues was primarily due to a decrease of 18.6% in the average outstanding balance of the customer accounts receivable portfolio. The decrease was partially offset by an increase in our insurance commissions as well as an increase in our yield rate. The yield rate for the year endedJanuary 31, 2022 was 22.8% compared to 21.7% for the year endedJanuary 31, 2021 .
The following table provides key portfolio performance information:
Year Ended January 31,
(dollars in thousands) 2022 2021 Change
Interest income and fees $ 259,422 $ 303,209 $ (43,787)
Net charge-offs (126,277) (227,134) 100,857
Interest expense (25,758) (50,381) 24,623
Net portfolio income $ 107,387 $ 25,694 $ 81,693
Average outstanding portfolio balance $ 1,135,991 $ 1,395,428 $ (259,437)
Interest income and fee yield 22.8 % 21.7 %
Net charge-off % 11.1 % 16.3 %
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Retail Gross Margin
Year Ended January 31,
(dollars in thousands) 2022 2021 Change
Retail total net sales $ 1,305,389 $ 1,064,311 $ 241,078
Cost of goods sold 825,987 668,315 157,672
Retail gross margin $ 479,402 $ 395,996 $ 83,406
Retail gross margin percentage 36.7 % 37.2 %
The year-over-year decrease in retail gross margin was primarily driven by an
increase in product costs and a slower rate of growth in repair service
agreement commissions and service revenues compared to the growth in product
sales. This was partially offset by a shift in sales from lower margin products
to higher margin products, lower financing fees and the impact of fixed
logistics costs on higher sales.
Selling, General and Administrative Expense
Year Ended January 31,
(dollars in thousands) 2022 2021 Change
Retail segment $ 399,393 $ 335,954 $ 63,439
Credit segment 145,097 142,813 2,284
Selling, general and administrative expense - Consolidated
34.2 % 34.5 %
The SG&A increase in the retail segment was primarily due to increases in labor
and occupancy costs related to new store growth and increases in variable
expenses associated with same store sales growth. The increase was also due to
increases in advertising and general operating costs.
As a percent of average total customer portfolio balance, SG&A for the credit
segment for the year ended January 31, 2022 increased 260 basis points as
compared to the year ended January 31, 2021 . The increase was primarily due to
an increase in the corporate overhead allocated to the credit segment due to an
increase in labor costs which was partially offset by a decrease in costs being
allocated to the credit segment due to the lower average customer accounts
receivable portfolio balance compared to the prior year.
Provision for Bad Debts
Year Ended January 31 ,
(dollars in thousands) 2022
2021 Change
Retail segment $ 479 $ 443 $ 36
Credit segment 47,705 201,560 (153,855)
Provision for bad debts - Consolidated $ 48,184
4.2 % 14.4 %
The provision for bad debts decreased to$48.2 million for the year endedJanuary 31, 2022 from$202.0 million for the year endedJanuary 31, 2021 , a decrease of$153.8 million . The year-over-year decrease was primarily driven by a greater decrease in the allowance for bad debts during the year endedJanuary 31, 2022 , compared to the decrease during the year endedJanuary 31, 2021 , and by a year-over-year decrease in net charge-offs of$100.9 million . The decrease in the allowance for bad debts for the year endedJanuary 31, 2022 was primarily driven by an improvement in the forecasted unemployment rate that drove a$31.5 million decrease in the economic reserve and a decline in the customer portfolio receivable balance, partially offset by an increase in loss rates. During the year endedJanuary 31, 2021 , the decrease in the allowance for bad debts was primarily driven by a decline in the customer accounts receivable portfolio balance partially offset by a$42.5 million increase in the economic reserve driven by an increase in forecasted unemployment rates stemming from the COVID-19 pandemic. 42
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Charges and Credits
Year Ended January 31,
(in thousands) 2022 2021 ChangeLegal and professional fees, securities-related litigation, a legal judgment and other legal matters
$ - $ 3,589 $ (3,589)
Employee severance - 2,737 (2,737)
Excess import freight costs 2,677 - 2,677
$ 2,677 $ 6,326 $ (3,649)
During the year ended January 31, 2022 , we recognized $2.7 million of
non-recurring domestic transportation costs incurred due to unprecedented
congestion in U.S. ports. During the year ended January 31, 2021 , we recognized
$3.6 million in professional fees associated with non-recurring expenses. In
addition, we recognized $2.7 million in severance costs related to a change in
the executive management team.
Interest Expense
Interest expense decreased to$25.8 million for the year endedJanuary 31, 2022 from$50.4 million for the year endedJanuary 31, 2021 , a decrease of$24.6 million . The decrease was driven by a lower average outstanding balance of debt and by a lower effective interest rate.
Loss (gain) on Extinguishment of Debt
During the year endedJanuary 31, 2022 , we incurred a loss of$1.2 million related to the retirement of the remaining$141.2 million aggregate principal amount of our 7.250% Senior Notes due 2022 ("Senior Notes") and to the amendment of our Fifth Amended and Restated Loan and Security Agreement. During the year endedJanuary 31, 2021 , we incurred a gain of$0.4 million related to the retirement of$85.8 million aggregate principal amount of our 7.250% Senior Notes due 2022 ("Senior Notes") in connection with a tender offer.
Provision (benefit) for Income Taxes
Year Ended January 31,
(dollars in thousands) 2022 2021 Change
Provision (benefit) for income taxes
23.6 % 83.8 %
The increase in the income tax expense for the year ended January 31, 2022
compared to the year ended January 31, 2021 was primarily driven by a $161.0
million increase of pre-tax book income at the statutory rate of 21%. In
addition, a benefit of $14.9 million was also recognized for the year ended
January 31, 2021 as a result of net operating loss provisions within the CARES
Act that provide for a five year carryback of losses.
Impact of Inflation and Changing Prices
We do not believe that inflation has had a material effect on our net sales or results of operations but we continue to monitor the impact the current rise in inflation may have on our customers and our business. Moreover, further significant increases in oil and gasoline prices could adversely affect our customers' shopping decisions and payment patterns. We rely heavily on our distribution system and our next day delivery policy to satisfy our customers' needs and desires, and increases in oil and gasoline prices could result in increased distribution costs and delivery charges. If we are unable to effectively pass increased transportation costs on to the consumer, either by increased delivery costs or higher prices, such costs could adversely affect our results of operations. In addition, the cost of items we purchase may increase or shortages of these items may arise as a result of changes in trade regulations, currency fluctuations, border taxes, import tariffs, or other factors beyond our control.
Seasonality
Our business is seasonal which typically means that a higher portion of sales and operating profit are realized during the fourth quarter due primarily to the holiday selling season. In addition, during the first quarter, our portfolio performance benefits from the timing of personal income tax refunds received by our customers, which typically results in higher cash collection rates.
Quarterly Results of Operations
Our quarterly results may fluctuate materially depending on factors such as the following:
•timing of new product introductions, new store openings and store relocations;
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•sales contributed by new stores;
•changes in our merchandise mix;
•increases or decreases in comparable store sales;
•changes in delinquency rates and amount of charge-offs with respect to customer accounts receivable;
•the pace of growth or decline in the customer accounts receivable balance;
•adverse weather conditions;
•shifts in the timing of certain holidays and promotions; and
•charges incurred in connection with store closures or other non-routine events.
Results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for a full fiscal year.
Customer Accounts Receivable Portfolio
We provide in-house financing to individual consumers on a short- and medium-term basis (contractual terms generally range from 12 to 36 months) for the purchase of durable products for the home. A significant portion of our customer credit portfolio is due from customers that are considered higher-risk, subprime borrowers. Our financing is executed using contracts that require fixed monthly payments over fixed terms. We maintain a secured interest in the product financed. If a payment is delayed, missed or paid only in part, the account becomes delinquent. Our collection personnel attempt to contact a customer once their account becomes delinquent. Our loan contracts generally reflect an interest rate of between 18% and 36%. We have implemented our direct consumer loan program across allTexas ,Louisiana ,Tennessee andOklahoma locations. The states ofTexas ,Louisiana ,Tennessee andOklahoma represent approximately 69% of our fiscal year 2022 originations, with maximum equivalent interest rates of up to 32% inOklahoma , up to 30% inTexas andTennessee , and up to 36% inLouisiana . In states where regulations do not generally limit the interest rate charged, our loan contracts generally reflect an interest rate between 29.99% and 35.99%. These states represented 14% of our fiscal year 2022 originations. We offer qualified customers a 12-month no-interest option finance program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of the interest earned is waived. We regularly extend or "re-age" a portion of our delinquent customer accounts as a part of our normal collection procedures to protect our investment. Generally, extensions are granted to customers who have experienced a financial difficulty (such as the temporary loss of employment), which is subsequently resolved, and when the customer indicates a willingness and ability to resume making monthly payments. These re-ages involve modifying the payment terms to defer a portion of the cash payments currently required of the debtor to help the debtor improve his or her financial condition and eventually be able to pay the account balance. Our re-aging of customer accounts does not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly contractual payments. We may also charge the customer an extension fee, which approximates the interest owed for the time period the contract was past due. Our re-age programs consist of extensions and two payment updates, which include unilateral extensions to customers who make two full payments in three calendar months in certain states. During the second quarter of fiscal year 2021, we changed our re-age policy to increase the number of days required for a customer to qualify for a unilateral re-age. Re-ages are not granted to debtors who demonstrate a lack of intent or ability to service the obligation or have reached our limits for account re-aging. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account, which typically does not change the interest rate or the total principal amount due from the customer but does reduce the monthly contractual payments and extends the term. Under these options, as with extensions, the customer must resolve the reason for delinquency and show a willingness and ability to resume making contractual monthly payments. OnMarch 27, 2020 the CARES Act was signed into law to address the economic impact of the COVID-19 pandemic. Under the CARES Act, modifications deemed to be COVID-19 related are not considered a TDR if the loan was current (not more than 30 days past due as ofMarch 31, 2020 ) and the deferral was executed betweenApril 1, 2020 and the earlier of 60 days after the termination of the COVID-19 national emergency orDecember 31, 2020 . In response to the CARES Act, the Company implemented short-term deferral programs for our customers. The carrying value of the customer receivables on accounts which were current prior to receiving a COVID-19 related deferment was$18.9 million as ofJanuary 31, 2022 . All COVID-19 specific deferral programs ended during the third quarter of fiscal year 2021. 44 -------------------------------------------------------------------------------- Table of Contents The following tables present, for comparison purposes, information about our managed portfolio (information reflects on a combined basis the securitized receivables transferred to the VIEs and receivables not transferred to the VIEs): January 31, 2022 2021 2020 Weighted average credit score of outstanding balances (1) 606 600 591 Average outstanding customer balance$ 2,498
10.4 % 12.4 % 12.5 %
Re-aged balance as a percentage of total customer portfolio carrying value (2)(3)(5)
16.8 % 25.9 % 29.4 %
Carrying value of account balances re-aged more than six months (in thousands) (3)
$ 50,282
18.5 % 24.2 % 14.6 %
Percent of total customer accounts receivable portfolio balance represented by no-interest option receivables (7)
33.7 % 20.5 % 17.7 %
Year Ended January 31,
2022 2021 2020
Total applications processed 1,297,025 1,251,002 1,235,712
Weighted average origination credit score of sales financed (1)
616 615 608
Percent of total applications approved and utilized 21.8 % 21.5 % 27.0 %
Average income of credit customer at origination $ 49,100 $ 47,100 $ 45,800
Percent of retail sales paid for by:
In-house financing, including down payments received 51.0 % 52.1 % 67.6 %
Third-party financing 17.7 % 20.4 % 17.8 %
Third-party lease-to-own option 10.4 % 8.5 % 7.0 %
79.1 % 81.0 % 92.4 %
(1)Credit scores exclude non-scored accounts.
(2)Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.
(3)Carrying value reflects the total customer accounts receivable portfolio balance, net of deferred fees and origination costs, the allowance for no-interest option credit programs and the allowance for uncollectible interest.
(4)Decrease was primarily due to an increase in cash collections that occurred in fiscal year 2022 and the tightening of underwriting standards that occurred in fiscal year 2021. (5)Decrease was primarily due to an increase in cash collections, the change in the unilateral re-age policy that occurred in the second quarter of fiscal year 2021 and the tightening of underwriting standards that occurred in fiscal year 2021. (6)For the periods endedJanuary 31, 2022 andJanuary 31, 2021 , the allowance for bad debts and uncollectible interest is based on the current expected credit loss methodology required under ASC 326. For the period endedJanuary 31, 2020 , the allowance for bad debts and uncollectible interest is based on the incurred loss methodology.
(7)Increase is due to a shift in underwriting strategy that occurred in the first quarter of fiscal year 2022.
Our customer portfolio balance and related allowance for uncollectible accounts are segregated between customer accounts receivable and restructured accounts. Customer accounts receivable include all accounts for which payment term has not been cumulatively extended over three months or refinanced. Restructured accounts includes all accounts for which payment term has been re-aged in excess of three months or refinanced. For customer accounts receivable (excluding restructured accounts), the allowance for uncollectible accounts as a percentage of the total customer accounts receivable portfolio balance decreased to 16.1% as ofJanuary 31, 2022 from 21.0% as ofJanuary 31, 2021 . The decrease in our allowance for uncollectible accounts was primarily related to a decline in the non-TDR re-age balance, improvements in 60+ day delinquencies and a decrease in the economic adjustment due to an improved macroeconomic outlook. 45 -------------------------------------------------------------------------------- Table of Contents The percentage of the carrying value of non-restructured accounts greater than 60 days past due decreased 40 basis points over the prior year period to 8.5% as ofJanuary 31, 2022 from 8.9% as ofJanuary 31, 2021 . For restructured accounts, the allowance for uncollectible accounts as a percentage of the restructured portfolio balance was 42.0% as ofJanuary 31, 2022 as compared to 41.6% as ofJanuary 31, 2021 . The increase is primarily due to an increase in the loss rate on restructured accounts. The percent of bad debt charge-offs, net of recoveries, to average outstanding portfolio balance was 11.1% for fiscal year 2022 compared to 16.3% for fiscal year 2021. The decrease in bad debt charge-offs, net of recoveries, was primarily due to increased cash collections and the tightening of underwriting standards that occurred in fiscal year 2021. As ofJanuary 31, 2022 and 2021, balances under no-interest programs included within customer receivables were$380.4 million and$252.8 million , respectively. This increase is due to a shift in the underwriting strategy that occurred in the first quarter of fiscal year 2022.
Liquidity and Capital Resources
We require liquidity and capital resources to finance our operations and future growth as we add new stores to our operations, which in turn requires additional working capital for increased customer receivables and inventory. We generally finance our operations through a combination of cash flow generated from operations, the use of our Revolving Credit Facility, and through periodic securitizations of originated customer receivables. We plan to execute periodic securitizations of future originated customer receivables. We believe, based on our current projections, that we have sufficient sources of liquidity to fund our operations, store expansion and renovation activities, and capital expenditures for at least the next 12 months. Operating cash flows. For the year endedJanuary 31, 2022 , net cash provided by operating activities was$176.4 million compared to$462.1 million for the year endedJanuary 31, 2021 . The decrease in net cash provided by operating activities was primarily driven by an increase in inventory in comparison to the prior year period when we were preserving liquidity in the midst of the COVID-19 pandemic, higher prior year collections due to a higher customer accounts receivable balance compared to the current year period and a decrease in net income when adjusted for non-cash activity. For the year endedJanuary 31, 2021 , net cash provided by operating activities was$462.1 million compared to$80.1 million for the year endedJanuary 31, 2020 . The increase in net cash provided by operating activities was primarily driven by a decrease in receivables resulting from both an increase in collections on customer accounts and a decrease in loan originations, a decrease in inventory driven by industry wide supply chain disruptions in certain product categories and the general timing of payments. These increases were partially offset by a decrease in net income when adjusted for non-cash activity. Investing cash flows. For the year endedJanuary 31, 2022 , net cash used in investing activities was$44.9 million compared to$55.9 million for the year endedJanuary 31, 2021 . The cash used during the year endedJanuary 31, 2022 was primarily for investments in new stores and technology investments. For the year endedJanuary 31, 2021 , net cash used in investing activities was$55.9 million compared to$56.8 million for the year endedJanuary 31, 2020 . The cash used during the year endedJanuary 31, 2021 was primarily for investments in new stores, two new distribution centers and technology investments. The cash used during the year endedJanuary 31, 2020 was primarily for investments in new stores, renovations and expansions of select existing stores and a new distribution center. Financing cash flows. For the year endedJanuary 31, 2022 , net cash used in financing activities was$152.2 million compared to net cash used in financing activities of$426.8 million for the year endedJanuary 31, 2021 and net cash used in financing activities of$7.3 million for the year endedJanuary 31, 2020 . During the year endedJanuary 31, 2022 , we issued 2020-A ClassC VIE asset backed notes and 2021-A VIE asset backed notes resulting in net proceeds to us of approximately$62.5 million and$375.2 million , net of transaction costs, respectively. The proceeds from the asset-backed notes were used to pay down the balance of the Company's Revolving Credit Facility and for other general corporate purposes. Cash collections from the securitized receivables were used to make payments on the asset-backed notes of approximately$483.9 million during the year endedJanuary 31, 2022 compared to approximately$599.1 million in the comparable prior year period. During the year endedJanuary 31, 2022 , net borrowings under our Revolving Credit Facility were$97.0 million compared to net borrowings of$22.9 million during the year endedJanuary 31, 2021 . During the year endedJanuary 31, 2022 , we retired the remaining$141.2 million aggregate principal amount of our Senior Notes outstanding. During the year endedJanuary 31, 2021 , we retired$85.8 million aggregate principal amount of our Senior Notes in connection with a tender offer, resulting in a payment on extinguishment of debt of$84.3 million , net of transaction costs paid. During the year endedJanuary 31, 2021 , we issued 2020-A VIE asset backed notes resulting in net proceeds to us of approximately$238.5 million , net of transaction costs. The proceeds from the 2020-A VIE asset-backed notes were used to pay down the balance of the Company's Revolving Credit Facility outstanding at the time of issuance and for other general corporate purposes. During the year endedJanuary 31, 2020 , we issued 2019-A VIE and 2019-B VIE asset-backed notes 46 -------------------------------------------------------------------------------- Table of Contents resulting in net proceeds to us of approximately$862.0 million , net of transaction costs and restricted cash held by the Issuer, which were used to pay down the balance of the Company's Revolving Credit Facility outstanding at the time of issuance and for other general corporate purposes. Share Repurchase Program. OnDecember 14, 2021 , our Board of Directors approved a stock repurchase program pursuant to which we had the authorization to repurchase up to$150 million of our outstanding common stock. The stock repurchase program expires onDecember 14, 2022 . For the year endedJanuary 31, 2022 , we repurchased 2,603,479 shares of our common stock at an average weighted cost per share of$22.61 for an aggregate amount of$58.9 million . Senior Notes. OnJuly 1, 2014 , we issued$250.0 million of the unsecured Senior Notes dueJuly 2022 bearing interest at 7.25%, pursuant to an indenture datedJuly 1, 2014 (as amended, the "Indenture"), amongConn's, Inc. , its subsidiary guarantors (the "Guarantors") andU.S. Bank National Association , as trustee. OnApril 15, 2021 we completed the redemption of all of our outstanding Senior Notes in an aggregate principal amount of$141.2 million . Asset-backed Notes. From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issue asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs. Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes, if any, and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis. The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events. The asset-backed notes outstanding as ofJanuary 31, 2022 consisted of the following: (dollars in thousands) Original Current Principal Original Net Principal Effective Asset-Backed Notes Amount Proceeds (1) Amount Issuance Date Maturity Date Contractual Interest Rate Interest Rate (2) 2020-A Class A Notes$ 174,900 $ 173,716 $ 9,184 10/16/2020 6/16/2025 1.71% 4.47% 2020-A Class B Notes 65,200 64,754 18,342 10/16/2020 6/16/2025 4.27% 5.51% 2020-A Class C Notes 62,900 62,535 17,695 2/24/2021 6/16/2025 4.20% 5.72% 2021-A Class A Notes 247,830 246,152 195,595 11/23/2021 5/15/2026 1.05% 2.43% 2021-A Class B Notes 66,090 65,635 66,090 11/23/2021 5/15/2026 2.87% 3.36% 2021-A Class C Notes 63,890 63,450 63,890 11/23/2021 5/15/2026 4.59% 5.07% Total$ 680,810 $ 676,242 $ 370,796
(1)After giving effect to debt issuance costs.
(2)For the year ended
OnFebruary 24, 2021 , the Company completed the sale of$62.9 million aggregate principal amount of 4.20% Asset Backed Notes, Class C, Series 2020-A, which were previously issued and held by the Company. The asset-backed notes are secured by the transferred customer accounts receivables and restricted cash held by a consolidated VIE, which resulted in net proceeds to us of$62.5 million , net of debt issuance costs. Net proceeds from the sale were used to repay amounts outstanding under the Company's Revolving Credit Facility. OnMay 12, 2021 , the Company completed the redemption of the 2019-A Asset Backed Notes at an aggregate redemption price of$41.1 million (which was equal to the entire outstanding principal balance plus accrued interest). 47 -------------------------------------------------------------------------------- Table of Contents OnNovember 23, 2021 , the Company completed the issuance and sale of$377.8 million aggregate principal amount of asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by a consolidated VIE, which resulted in net proceeds to us of$375.2 million , net of debt issuance costs. Net proceeds from the offering were used to repay indebtedness under the Company's Revolving Credit Facility, as defined below, and for other general corporate purposes. The asset-backed notes mature onMay 15, 2026 and consist of$247.8 million of 1.05% Asset Backed Fixed Rate Notes, Class A, Series 2021-A,$66.1 million of 2.87% Asset Backed Fixed Rate Notes, Class B, Series 2021-A, and$63.9 million of 4.59% Asset Backed Fixed Rate Notes, Class C, Series 2021-A Asset Backed Fixed Rate Notes. OnDecember 30, 2021 the Company completed the redemption of the 2019-B Asset Backed Notes at an aggregate redemption price of$52.4 million (which was equal to the entire outstanding principal balance plus accrued interest). Revolving Credit Facility. OnMarch 29, 2021 ,Conn's, Inc. and certain of its subsidiaries (the "Borrowers") entered into the Fifth Amended and Restated Loan and Security Agreement (the "Fifth Amended and Restated Loan Agreement"), with certain lenders, which provides for a$650.0 million asset-based revolving credit facility (as amended, the "Revolving Credit Facility") under which credit availability is subject to a borrowing base and a maturity date ofMarch 29, 2025 . The Fifth Amended and Restated Loan Agreement, among other things, permits borrowings under the Letter of Credit Subline (as defined in the Fifth Amended and Restated Loan Agreement) that exceed the cap of$40 million to$100 million , solely at the discretion of the lenders for such amounts in excess of$40 million . The obligations under the Revolving Credit Facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As ofJanuary 31, 2022 , we had immediately available borrowing capacity of$352.2 million under our Revolving Credit Facility, net of standby letters of credit issued of$22.5 million . Loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 2.50% to 3.25% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum (depending on a pricing grid determined by our total leverage ratio). The alternate base rate is a rate per annum equal to the greatest of the prime rate, the federal funds effective rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. We also pay an unused fee on the portion of the commitments that is available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.50% per annum, depending on the average outstanding balance and letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the Revolving Credit Facility was 4.0% for the year endedJanuary 31, 2022 . The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make distributions to the Company and other obligors under the Revolving Credit Facility without restriction. As ofJanuary 31, 2022 , we were restricted from making distributions in excess of$225.9 million as a result of the Revolving Credit Facility distribution and payment restrictions. The Revolving Credit Facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit Facility. Debt Covenants. We were in compliance with our debt covenants atJanuary 31, 2022 . A summary of the significant financial covenants that govern our Revolving Credit Facility compared to our actual compliance status atJanuary 31, 2021 is presented below: Required Minimum/ Actual Maximum
Interest Coverage Ratio for the quarter must equal or exceed minimum 8.35:1.00
1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed minimum
9.29:1.00 1.50:1.00
Leverage Ratio must not exceed maximum 1.38:1.00 4.50:1.00
ABS Excluded Leverage Ratio must not exceed maximum 0.83:1.00 2.50:1.00
Capital Expenditures, net, must not exceed maximum $30.7 million $100.0 million
All capitalized terms in the above table are defined by the Revolving Credit
Facility and may or may not agree directly to the financial statement captions
in this document. The covenants are calculated quarterly, except for capital
expenditures, which is calculated for a period of four consecutive fiscal
quarters, as of the end of each fiscal quarter.
Capital Expenditures. We lease the majority of our stores under operating
leases, and our plans for future store locations anticipate operating leases,
but do not exclude store ownership. Our capital expenditures for future new
store projects should primarily be for our tenant improvements to the property
leased (including any new distribution centers and cross-dock facilities), the
cost of which is estimated to be between $1.5 million and $2.7 million per store
(before tenant improvement
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allowances), and for our existing store remodels, estimated to range between
$0.3 million and $0.9 million per store remodel (before tenant improvement
allowances), depending on store size. In the event we purchase existing
properties, our capital expenditures will depend on the particular property and
whether it is improved when purchased. We are continuously reviewing new
relationships and funding sources and alternatives for new stores, which may
include "sale-leaseback" or direct "purchase-lease" programs, as well as other
funding sources for our purchase and construction of those projects. If we do
not purchase the real property for new stores, our direct cash needs should
include only our capital expenditures for tenant improvements to leased
properties and our remodel programs for existing stores. We opened 12 new stores
during fiscal year 2022, and currently plan to open 13 to 16 new stores during
fiscal year 2023. Additionally, we plan to renovate several of our stores during
fiscal year 2023. Our anticipated capital expenditures for fiscal year 2023 are
between $90.0 and $100.0 million , which is primarily related to new store
construction, existing store remodels, opening new distribution centers for
geographic expansion and technology investments.
Cash Flow. We periodically evaluate our liquidity requirements, capital needs
and availability of resources in view of inventory levels, expansion plans, debt
service requirements and other operating cash needs. To meet our short- and
long-term liquidity requirements, including payment of operating expenses,
funding of capital expenditures and repayment of debt, we rely primarily on cash
from operations. As of January 31, 2022 , beyond cash generated from operations
we had (i) immediately available borrowing capacity of $352.2 million under our
Revolving Credit Facility and (ii) $7.7 million of cash on hand. However, we
have, in the past, sought to raise additional capital.
We expect that for the next 12 months and the foreseeable future, cash generated
from operations, proceeds from potential accounts receivable securitizations and
our Revolving Credit Facility will be sufficient to provide us the ability to
fund our operations, provide the increased working capital necessary to support
our strategy and fund capital expenditures as discussed above in Capital
Expenditures.
We may repurchase or otherwise retire our debt and take other steps to reduce
our debt or otherwise improve our financial position. These actions could
include open market debt repurchases, negotiated repurchases, other retirements
of outstanding debt and opportunistic refinancing of debt. The amount of debt
that may be repurchased or otherwise retired, if any, will depend on market
conditions, the Company's cash position, compliance with debt covenant and
restrictions and other considerations.
Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4)
of Regulation S-K. The following table presents a summary of our minimum
contractual commitments and obligations as of
Payments due by period
Less Than 1 1-3 3-5 More Than
(in thousands) Total Year Years Years 5 Years
Debt, including estimated interest
payments:
Revolving Credit Facility (1) $ 161,356 $ 3,911 $ 7,823 $ 149,622 $ -
2020-A Class A Notes (2) 9,713 157 314 9,242 -
2020-A Class B Notes (2) 20,985 783 1,566 18,636 -
2020-A Class C Notes (2) 20,202 743 1,486 17,973 -
2021-A Class A Notes (2) 204,401 2,054 4,107 198,240 -
2021-A Class B Notes (2) 74,223 1,897 3,794 68,532 -
2021-A Class C Notes (2) 76,464 2,933 5,865 67,666 -
Financing lease obligations 7,876 1,197 2,371 1,369 2,939
Operating leases:
Real estate 506,296 86,856 159,143 115,617 144,680
Equipment 105 70 27 8 -
Contractual commitments (3) 95,853 89,802 5,826 225 -
Total $ 1,177,474 $ 190,403 $ 192,322 $ 647,130 $ 147,619 (1)Estimated interest payments are based on the outstanding balance as of
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(2)The payments due by period for the asset-backed notes were based on their
respective maturity dates at their respective fixed annual interest rate. Actual
principal and interest payments on the asset-backed notes will reflect actual
proceeds from the securitized customer accounts receivables.
(3)Contractual commitments primarily include commitments to purchase inventory
of
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Issuer and Guarantor Subsidiary Summarized Financial Information
Conn's, Inc. is a holding company with no independent assets or operations other
than its investments in its subsidiaries. As of January 31, 2022 , the direct or
indirect subsidiaries of Conn's, Inc. that were not Guarantors (the
"Non-Guarantor Subsidiaries") were the VIEs and minor subsidiaries. There are no
restrictions under the Indenture on the ability of any of the Guarantors to
transfer funds to Conn's, Inc. in the form of dividends or distributions.
The following tables present on a combined basis for the Issuer and the
Guarantor Subsidiaries, a summarized Balance Sheet as of January 31, 2022 and a
summarized Statement of Operations on a consolidated basis for the twelve months
ended January 31, 2022 . The information presented below excludes eliminations
necessary to arrive at the information on a consolidated basis. Investments in
subsidiaries are accounted for by the parent company using the equity method for
purposes of this presentation. Amounts provided do not represent our total
consolidated amounts, as of January 31, 2022 and for the twelve months ended
January 31, 2022 :
January 31 ,
(in thousands) 2022
Assets
Cash, cash equivalents and restricted cash $ 9,765
Customer accounts receivable, net of allowances
243,527
Inventories
246,826
Net due from non-guarantor subsidiary 14,903 Other current assets 78,556 Total current assets 593,577
Long-term portion of customer accounts receivable, net of allowances
264,527
Property and equipment, net
192,763
Right of use assets, net 256,267 Other assets 52,199 Total assets$ 1,359,333 Liabilities Current portion of debt $
889
Lease liability operating - current 54,534 Other liabilities 200,326 Total current liabilities 255,749 Lease liability operating - non current 330,439 Long-term debt 154,224 Other long-term liabilities 26,889 Total liabilities$ 767,301 Year Ended (in thousands) January 31, 2021 Revenues: Net sales and finances charges $
1,500,510
Servicing fee revenue from non-guarantor subsidiary 44,177
Total revenues 1,544,687
Total costs and expenses 1,484,264
Net income $ 60,423
51-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity withU.S. GAAP requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Certain accounting policies, as described below, are considered "critical accounting policies" because they are particularly dependent on estimates made by us about matters that are inherently uncertain and could have a material impact to our consolidated financial statements. We base our estimates on historical experience and on other assumptions that we believe are reasonable. As a result, actual results could differ because of the use of estimates. A summary of all of our significant accounting policies is included in Note 1, Summary of Significant Accounting Policies, of the Consolidated Financial Statements in Part II, Item 8., of this Annual Report on Form 10-K. Allowance for doubtful accounts. The determination of the amount of the allowance for credit losses is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the allowance for credit losses. General economic conditions, changes to state or federal regulations and a variety of other factors that affect the ability of borrowers to service their debts or our ability to collect will impact the future performance of the portfolio. We establish an allowance for credit losses, including estimated uncollectible interest, to cover expected credit losses on our customer accounts receivable resulting from the failure of customers to make contractual payments. Our customer accounts receivable portfolio balance consists of a large number of relatively small, homogeneous accounts. None of our accounts are large enough to warrant individual evaluation for impairment. OnFebruary 1, 2021 , we adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326"). The allowance for credit losses is measured on a collective (pool) basis where similar risk characteristics exist. The allowance for credit losses is determined for each pool and added to the pool's carrying amount to establish a new amortized cost basis. We have elected to use a risk-based, pool-level segmentation framework to calculate the expected loss rate. This framework is based on our historical gross charge-off history. In addition to adjusted historical gross charge-off rates, estimates of post-charge-off recoveries, including cash payments from customers, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance and repair service agreement ("RSA") policies are also considered. We also consider forward-looking economic forecasts based on a statistical analysis of economic factors (specifically, forecast of unemployment rates over the reasonable and supportable forecasting period). To the extent that situations and trends arise which are not captured in our model, management will layer on additional qualitative adjustments. Pursuant to ASC 326 requirements, the Company uses a 24-month reasonable and supportable forecast period for the Customer Accounts Receivable portfolio. We estimate losses beyond the 24-month forecast period based on historic loss rates experienced over the life of our historic loan portfolio by loan pool type. We revisit our measurement methodology and assumption annually, or more frequently if circumstances warrant. As ofJanuary 31, 2022 and 2021, the balance of allowance for doubtful accounts and uncollectible interest for non-TDR customer receivables was$165.0 million and$219.7 million , respectively. As ofJanuary 31, 2022 and 2021, the amount included in the allowance for doubtful accounts associated with principal and interest on TDR accounts was$44.0 million and$78.3 million , respectively. A 100 basis point increase in our estimated gross charge-off rate would increase our allowance for doubtful accounts on our customer accounts receivable by$7.3 million based on the balance outstanding atJanuary 31, 2022 . Interest income on customer accounts receivable. Interest income, which includes interest income and amortization of deferred fees and origination costs, is recorded using the interest method and is reflected in finance charges and other revenues. Typically, interest income is recorded until the customer account is paid off or charged-off, and we provide an allowance for estimated uncollectible interest. Any contractual interest income received from customers in excess of the interest income calculated using the interest method is recorded as deferred revenue on our balance sheets. AtJanuary 31, 2022 and 2021, there were$8.6 million and$8.9 million , respectively, of deferred interest included in deferred revenues and other credits and other long-term liabilities. The deferred interest will ultimately be brought into income as the accounts pay off or charge-off. We offer a 12-month no-interest option program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of the interest earned is waived. Interest income is recognized based on estimated accrued interest earned to date on all no-interest option finance programs with an offsetting reserve for those customers expected to satisfy the requirements of the program based on our historical experience. We recognize interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it equals the present value of expected future cash flows. 52 -------------------------------------------------------------------------------- Table of Contents We place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the amount of the loan. AtJanuary 31, 2022 and 2021, the carrying value of customer accounts receivable in non-accrual status was$5.9 million and$8.5 million . AtJanuary 31, 2022 and 2021, the carrying value of customer accounts receivable that were past due 90 days or more and still accruing interest totaled$84.1 million and$111.5 million , respectively. AtJanuary 31, 2022 and 2021, the carrying value of customer accounts receivable in a bankruptcy status that were less than 60 days past due of$5.5 million and$5.2 million , respectively, were included within the customer receivables balance carried in non-accrual status. Inventories. Inventories consist of merchandise purchased for resale and service parts and are recorded at the lower of cost or net realizable value. The carrying value of the inventory is reduced to its net realizable value for any product lines with excess of carrying amount, typically weighted-average cost, over the amount we expect to realize from the ultimate sale or other disposition of the inventory, with a corresponding charge to cost of sales. The write-down of inventory to net realizable value is estimated based on assumptions regarding inventory aging and historical product sales. A 10% difference in our actual inventory reserve atJanuary 31, 2022 , would have affected our cost of goods sold by$0.3 million . Impairment of Long-Lived Assets. Long-lived assets are evaluated for impairment, primarily at the asset group level. The asset group is defined as stores and cross-docks within a distribution center's service area. We monitor asset group performance in order to assess if events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The most likely condition that would necessitate an assessment would be an adverse change in historical and estimated future results of an asset group's performance. For property and equipment held and used, we recognize an impairment loss if the carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the carrying amount and estimated fair value. During the year endedJanuary 31, 2020 , we recognized$3.2 million in impairments from the exiting of certain leases. See Note 4, Charges and Credits, for details. For the years endedJanuary 31, 2022 and 2021 there were no impairments. Vendor allowances. We receive funds from vendors for price protection, product rebates (earned upon purchase or sale of product), marketing, and promotion programs, collectively referred to as vendor allowances, which are recorded on an accrual basis. We estimate the vendor allowances to accrue based on the progress of satisfying the terms of the programs based on actual and projected sales or purchase of qualifying products. If the programs are related to product purchases, the vendor allowances are recorded as a reduction of product cost in inventory still on hand with any remaining amounts recorded as a reduction of cost of goods sold. During the years endedJanuary 31, 2022 , 2021 and 2020, we recorded$118.1 million ,$122.7 million and$156.6 million , respectively, as reductions in cost of goods sold from vendor allowances.
Recent Accounting Pronouncements
The information related to recent accounting pronouncements as set forth in Note 1, Summary of Significant Accounting Policies, of the Consolidated Financial Statements in Part II, Item 8., of this Annual Report on Form 10-K is incorporated herein by reference.
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