Restoration Hardware’s financial statements paint a picture of very high growth. In the past, the financials were more or less internally consistent. Numbers with a relationship to revenues (taxes paid, contingent rent, actual sales returns, employee count) largely tracked the growth in revenue growth. What’s curious in the latest 10-K is that actual sales returns no longer track reported revenues due to an error identified for FY2013 and FY2012.
(This idea is not liquid as it involves LEAP options expiring Jan 2017.)
KORS is a luxury goods company with extremely high growth (44%+) and returns on capital (86%).
The trade I am interested in is going long KORS call options and long COH put options. I think that both trades are compelling by themselves. See my old and brief writeup on COH for my thesis on that company. This post will focus on KORS. The reason to go long KORS call options are:
After Conn’s released its earnings, the stock fell by roughly two fifths from $35.09 to $20.83. The market was presumably spooked because credit losses were fairly high relative to expectations. While management has previously stated that the aspirational goal for static loss rates was 8%, it looks like Conn’s may exceed that for 2013 and 2014 vintage originations. Refer to the static loss tables in the 10-Q (page 32) and make your own extrapolations.
Conn’s originations seem to exceed the amount of money lent to its customers.
In FY2014, Conn’s originations were $1,075M.
It provided $757.2M in in-house financing, including down payments and excluding insurance.
The ratio between originations versus in-house financing was ~142%.
My diagram compares the Static Loss data presented in the Q2 2014 10-Q versus the 2013 10-K. For some reason the numbers are different and I have no idea why. I honestly don’t have any good theories.
(This is not a short writeup where I say what I truly think. I don’t like doing such writeups because I don’t want to get sued.)
In a nutshell, I think that it is worth taking a deep dive into Conn’s lending practices. In my opinion, the 10-Ks and 10-Qs seem to ignore some important ‘nuances’ of Conn’s lending practices.
I think that investors should pay attention to all of the costs being capitalized in the latest 10-Q.
