Conn's, Inc.

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Conn's, Inc.

3295 College Street
Beaumont, Texas 77701
U.S.A.
Telephone: (409) 832-1696
Fax: (409) 832-4344
Web site: http://www.conns.com

Public Company
Founded: 1890 as Eastham Plumbing and Heat Co.
Employees: 2,050
Sales: $499.3 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: CONN
NAIC: 443111 Household Appliance Stores

Conn's, Inc., a publicly traded company based in Beaumont, Texas, operates a chain of some 50 appliance stores in Texas and Louisiana, including 18 units in Houston; 13 in the San Antonio and Austin market; five in the "Golden Triangle" of Texas and Louisiana; five in the Baton Rouge and Lafayette, Louisiana, area; and one in Corpus Christi, Texas. About 40 percent of all stores are stand-alone buildings, with the rest found in shopping strip centers and larger enclosed malls. Units generally include 19,000 square feet of selling space and offer more than 1,100 product items. Merchandise includes such major home appliances as ranges, washers, dryers, refrigerators, and freezers; consumer electronics products such as televisions, DVD players, home theater systems, digital cameras, and video cameras; computers and handhelds for home office use; bedding by Serta; air conditioners and combination heaters and air conditioners; lawn and garden items such as lawnmowers, tractors, and grills; small appliances, including vacuum cleaners, air purifiers, water coolers, and wine coolers; kitchen products including cookware, cutlery sets, coffee makers, toasters, toaster ovens, slow cookers, griddles, mixers, ice makers, rotisseries, and deep fryers; and miscellaneous appliances such as sewing machines, electric shavers, and hair trimmers. Because it often competes with much larger retailing chains—Wal-Mart, Target, Circuit City, and Best Buy—that can use their size to offer lower prices, Conn's places a great deal of emphasis on customer service and timeliness. Complaints are generally resolved within 48 hours and stores offer same-day or next-day delivery. Conn's has been publicly traded on the NASDAQ since 2003, and hopes to take advantage of its new status to accelerate the chain's growth in existing and new markets.

Lineage Dating to 19th Century

Conn's traces its history to 1890 when Edward Eastham founded Eastham Plumbing and Heat Company in Beaumont, Texas. After the Republic of Texas was formed, years before it became part of the United States, Beaumont in 1838 was designated a county seat, which ensured local prominence. At the start of the 20th century, the city, located between Houston and the Louisiana border, boasted four railroads and a population approaching 10,000. Then, in 1901, oil was discovered in the vicinity, leading to a rapid increase in Beaumont's population, which doubled within ten years and increased to 58,000 by 1930. Eastham Plumbing and Heating grew with the town, but in 1931, in the midst of the Depression, the business failed. It was taken over by the First National Bank of Beaumont and renamed Plumbing and Heating Inc. The company soon came into the hands of an area oil baron who essentially bought the business to make sure he had an available plumber, after a recent cold snap had burst his pipes and he had been unable to get someone to do the repair work. In 1933 C.W. Conn, Sr., who had been selling appliances for an area gas company, was hired to run Plumbing and Heating with an option to buy it. A year later he exercised the option, bought the company, and renamed it Conn Plumbing and Heating Company. In 1937 he began the transition away from plumbing and heating when he started selling refrigerators, soon adding gas ranges. By the end of the decade he was selling his wares out of a downtown Beaumont storefront.

C.W. Conn would be joined by his son, C.W. Conn, Jr., who as early as the age of three earned a dollar for cleaning out a bathtub at the store. After he grew up, in 1953, he went to work at the store on a full-time basis. It was during this period that Conn's present-day chief executive and chairman, Thomas J. Frank, Sr., and his family began their association with the company. His father, John J. Frank, Jr., first went to work for Conn's in 1956, taking a job as a salesman on the floor. He was in his late 30s at the time, and some 50 years later, when he was well into his 80s, would still be employed by the company selling trade-in appliances and doing some customer relations work. His son started out working at Conn's in 1957 when he was a high school junior, serving as a delivery truck helper. He would go on to college at Sam Houston State University, earning a degree in industrial arts and later taking graduate courses at Texas A&M University and Harvard University. Tom Frank began his full-time career at Conn's in the early 1960s and alongside C.W. Conn, Jr., would play an instrumental role in growing the Beaumont appliance store into a major regional chain. During his ascent to the top, Frank held key positions in all areas of the organization, involved in distribution, service, credit, information technology, accounting, and general operations. He became a member of the board of directors in 1980.

C.W. Conn, Jr., succeeded his father as the head of the business, and took it to an entirely new level. A second store, also in Beaumont, was not added until 1959. During the Baby Boom years of the 1950s the town was growing at a fast clip and able to support a second location. The population increased from 94,000 in 1950 to nearly 120,000 ten years later. The site for the second Conn Appliance store was considered remote at the time, located in the rural outskirts of Beaumont. In fact, the store was set up in an old dairy barn that was converted by laying down a cement floor. The younger Conn also was responsible for launching a credit operation; offering financing to customers was a key element in the retailer's growth.

Chain Beginning to Form in the 1960s

Conn's added two more stores in Beaumont by 1966 and at this stage was generating annual sales of $4 million. The next step for the small chain was to expand into the so-called Golden Triangle region that extended from southeastern Texas into the southwestern part of Louisiana. In 1969 Conn's opened its first two Louisiana stores. Additional stores were added in 1975, in Port Arthur, Orange, and Baytown, Texas, and Lafayette, Louisiana. In short order, a second Lafayette location was opened, as well as stores in Opelousas, Louisiana. Also in 1975, C.W. Conn, Sr., died and was replaced as chairman by his namesake.

In 1983 the emerging appliance chain would expand westward to the Houston market. It was not the best of times to do business in a city very much dependent on the oil business. Plummeting commodity prices crippled the industry, bankrupting a large number of companies and resulting in the loss of many jobs and a reduction in the number of people looking to buy new televisions and washing machines. But the retailer persevered until conditions improved, so that Houston with 18 units would eventually enjoy the greatest concentration of Conn Appliance stores in the chain's area of operations.

Conn's expanded into San Antonio in 1993, the same year that the company cracked the $100 million mark in revenues. But Conn's had now reached a key moment: Management concluded that it had to reposition the chain if it were to realize even greater growth. Tom Frank succeeded C.W. Conn, Jr., as CEO and chairman and new talent was added to the management team, including David R. Atnip, who took over as chief financial officer. Williams C. Nylin, Jr., would become president and chief operating officer in 1995, and Frank's brother, C. William Frank, also would join the company, taking over as CFO while Atnip became secretary/treasurer of the company. In addition, Conn's made the investments necessary to upgrade its infrastructure and took steps to refine its operating strategy. Also in 1994 Conn's moved into another Texas market, opening its first store in the San Antonio/Austin area. All told, by the end of fiscal 1994 the chain totaled 21 stores.

Despite the changes made, between fiscal 1994 and fiscal 1999, Conn's added only another five stores, but operating margins improved from 5.3 percent to 8.7 percent. The chain reached $200 million in annual sales volume in 1999. The chain would now begin an accelerated rate of expansion, due in large part to new ownership, which possessed the financial resources to grow the business. In 1998 the Arkansas-based Stephens family and its business interests bought a controlling interest in the chain from the Conn family. The Stephens family ran a major regional investment banking firm, which had fallen out of step with the way investment banking was being conducted in the 1990s. It was now actively looking for opportunities with small and midsized companies such as Conn's.

Company Perspectives:

We are known for providing excellent customer service, and we believe that our customer-focused business strategies make us an attractive alternative to appliance and electronics superstores, department stores and other national, regional and local retailers.

Stephens Inc. was founded by Wilton R. Stephens in 1933 to broker cheap Arkansas highway bonds hurt by the Depression, which his father, a state legislator, convinced him the state would eventually honor. When the economy recovered during the early 1940s, spurred by the military spending of World War II, the bonds were paid off at par and Stephens was well positioned to grow into an important regional banking firm, one that followed in the tradition of merchant banks, in which relationships between gentlemen were as important in landing business as the strength of a firm's balance sheet. Witt Stephens's brother, Jackson, joined the firm in 1946 and ten years later became an equal partner and took over as CEO. He headed the firm for the next 30 years, growing it into what many regarded as the premier regional investment banking firm in the country, and 15th largest in the industry. Jack Stephens took full advantage of his connections with Arkansas's business elite, including Don Tyson of Tyson Foods Inc. and Sam Walton of Wal-Mart fame. After he retired in 1986 and was succeeded by his son Warren, the firm continued to play an influential role in Arkansas business and politics, but it began to lose its edge in the wider arena. Such major Wall Street firms as Merrill Lynch and Morgan Stanley Dean Witter began invading Stephens's traditional turf and the Arkansas firm was slow to take up the challenge and adapt to changing conditions. The result was that business dried up, the firm was afforded few opportunities to underwrite stock offerings, and Stephens slipped to the 80th spot in terms of size. Finally, in the late 1990s, Stephens hired a roster of new investment bankers, analysts, and sales people to drum up opportunities, one of which was the purchase of a regional appliance store chain.

Preparing to Go Public in the Late 1990s

Over the next five years, Conn's management team and Stephens grew the retailer in preparation of taking the company public and realizing a profit for the investment banker. The chain moved into the Baton Rouge, Louisiana, market in 1999. It added more warehouse space and in 2000 thought about moving its headquarters to Houston, where it operated its largest number of stores and maintained a distribution center. Beaumont city officials as well as the Chamber of Commerce convinced the company to stay. Conn's acquired a former supermarket and converted it into a new corporate center, remodeling some 66,000 square feet for credit, customer service, and administrative offices. Subsequently, the company remodeled another 18,000 square feet to create a new parts distribution center. In addition, Conn's opened a new store close by to replace the chain's second location. It would also be used to help in some aspects of employee training, all the operations of which would now be moved to Beaumont. The chain then opened its first stores in Austin and Corpus Christi in 2002.

In fiscal 1999, which ended July 31 of that year, Conn's recorded sales of $236.7 million and net income of nearly $9 million. With the addition of new stores, the chain improved revenues to $279.7 million in fiscal 2000 and $330.3 million a year later. Net income during this period improved from $12.6 million to more than $15 million. The company then changed its fiscal year to end on January 31 of the ensuing year. Thus in fiscal 2002, ending January 2003, Conn's saw its revenues increase to $382.1 million and net income approach $20 million. Also in January 2003 Conn's, Inc. was incorporated in Delaware in preparation of taking the appliance chain public. An initial offering of stock, priced at $14 per share, was completed in December 2003, underwritten in part by Stephens Inc. The proceeds were earmarked to pay down debt by nearly $35 million as well as for future growth. At the time of the offering, Conn's was operating 42 stores. Markets the chain hoped to penetrate over the next several years included the Dallas-Fort Worth area and the Texas-Mexican border region of the Rio Grande Valley in southwest Texas. In Louisiana, Conn's targeted New Orleans as well as Shreveport, Monroe, and Alexandria in central Louisiana. In addition, Conn's intended to expand its market presence in areas where it already operated stores.

Preparing for the public offering had diverted some of management's focus away from meeting a goal of reaching $500 million in sales for fiscal 2003. The situation was exacerbated by dropping prices in electronics, which required the chain to move more merchandise to make up the difference. For the first time, the chain had to contend with a dip in same-store sales, minus 3 percentage points, prompting management to institute a recovery plan. New merchandise was added, such as bedding, lawn and garden products, and small electronic components. By the end of the year same-store sales improved to plus 3.57 percentage points and the company fell just $700,000 short of the $500 million mark. The company planned to open three to five stores in fiscal 2004 and another four to six in fiscal 2005. Conn's also was taking steps to adopt a new, larger prototype store, offering as much as 24,000 square feet of retail space, some 15 percent larger that the previous one. Moreover, management established a new and ambitious goal, reaching the $1 billion mark in annual sales.