Dec 9, 2014
Executives
Theo Wright - Chief Executive Officer Mike Poppe - Chief Operating Officer David Trahan - President, Retail Mark Haley - Interim CFO
Analysts
Peter Keith - Piper Jaffray Rick Nelson - Stephens Laura Champine - Canaccord Brad Thomas - KeyBanc Capital Markets Dillard Watt - Stifel David Magee - SunTrust Karru Martinson - Deutsche Bank Andrew Hain - Baird Daniel Gurvich - Beach Point Capital
Operator
Good morning and thank you for holding. Welcome to the Conn's Incorporated Conference Call to Discuss Earnings for the Third Quarter ended October 31, 2014.
My name is Karen, and I will be your operator today. During the presentation, all participants will be in a listen-only mode.
After the speakers’ remarks, you will be invited to participate in the question-and-answer session. As a reminder, this conference call is being recorded.
The company's earnings release dated December 9, 2014 distributed before the market opened this morning and slides that will be referenced during today's conference call can be accessed via the company's Investor Relations website at ir.conns.com. I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934.
These forward-looking statements represent the company’s present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today.
Your speakers today are Theo Wright, the company’s CEO; Mike Poppe, the company's COO; David Trahan, the company’s President of Retail; and Mark Haley, the company's Interim CFO. I would like to turn the conference over to Mr.
Wright. Please go ahead, sir.
Theo Wright
Good morning. And welcome to Conn’s third quarter of fiscal 2015 earnings conference call.
I'll begin the call with an overview and then Mike will discuss our Credit segment further. Our results for the third quarter of fiscal 2015 were disappointing, while we experienced significant growth and expanded gross margins in the Retail segment.
Unfortunately, these gains were more than offset by additional provisions for credit losses. The Board and management team are not complacent about these results and as you will see, we are collectively engaged and committed to strengthening our management team, enhancing oversight of the business and improving the company’s performance.
I will begin with an overview of the Retail segment. Over the last 10 months we’ve successfully opened an additional 20 stores in eight markets and three new warehouses.
We are reaching more customers than ever before, giving low income consumers the opportunity to purchase quality, durable, branded products for their homes at affordable monthly payments. Revenues and gross margins expanded yet again in the quarter and operating income in the Retail segment grew.
However, as I mentioned, our effectiveness in Retail operations was more than offset by additional provisions for credit losses. Despite, steadily tightening credit standards over the last year and improvements in collections execution, performance deteriorated in the quarter.
November credit performance did have [provide] [ph] evidence of stabilization with the over 60-day delinquency rates stable and 30 to 60-day delinquency declining to levels below year ago. We are committed to improving performance in the Credit segment through better execution and oversight.
To that end, the Board has introduced the number of initiatives, which we announced today. The Board has established the credit risk and compliance committee responsible for reviewing credit risks, underwriting strategy and credit compliance activities.
The committee will supervise an independent evaluation of underwriting standards. The Board is also commenced efforts to augment the management team.
The Board has initiated a search for a President to provide additional senior leadership for the company. The search has also been initiated for a Chief Risk Officer to provide additional capability in analyzing and assessing credit risk.
The previously announced strategic alternatives process is underway and the company is actively engaged with its advisors exploring a number of potential strategic alternatives. Turning to underwriting, on slide one is our average FICO score in the portfolio for the last five years.
The portfolio has been in the narrow range of credit quality remained there in the last quarter. In late fiscal 2014 and throughout fiscal 2015 we made changes to our underwriting to reduce risk.
These changes were reflected in the FICO score underwritten in Q3 of fiscal 2015 of 608, compared to 599 in Q3 of fiscal 2014. [Debt] [ph] has increased as well.
The aggregate impact of these changes is estimated to be a reduction in sales rate of 12% compared to the third quarter a year ago. As we have indicated previously, the fiscal 2014 originations, static losses will be elevated and we expect these to be around 9.5% based on current collections trends.
Fiscal 2015 originations, static loss had been expected to trend down from fiscal 2014 because of tighter underwriting standards. Based on current delinquency, we do not yet see the expected improvement in 2015 originations pool and the time to charge-off is faster than expected.
However, we have tightened underwriting in a series of steps over the past year. Importantly, the reported provision rate for the quarter is not an indication of our expectation for future static losses.
We expect the provision rate to decline significantly in the fourth quarter from third quarter levels. We recorded additional provisions for credit losses this quarter, based on the assumption that we will not realize any improvement in these trends over the next 12 months.
Despite the underwriting changes and improved collections execution. The amount recorded in the quarter represented the full impact of the additional expected losses for the next 12 months, not just the expected increase and charge-offs in the quarter.
Our long-term goal is to deliver a static loss of 8%. To achieve this goal we are increasing the origination of higher credit score receivables.
Beginning in late October we began to originate 18 and 24-month no interest loans to higher credit score customers. Prior to October, Synchrony Financial offered these loans to our customers.
We will continue to use Synchrony exclusively for longer term, typically 36 months no interest programs and may use Synchrony for other no interest programs from time-to-time. In November, our average FICO score underwritten was 614.
In the third quarter, total originations increased over the prior year third quarter 12% compared to a growth rate of 65% a year ago. The slower growth rate in the portfolio should benefit credit quality.
In addition to having higher expected losses from new customer originations, losses from originations for new customers also occur faster. The expectation of accelerated losses increased the provision this quarter and is due largely to the higher proportion of new customers in the portfolio.
As our sales comparisons have slowed significantly, the origination should shift to a low proportion of new customers. As the shift in origination occurs over the next year or so, the portfolio composition should change to a higher proportion of repeat customers.
This change in proportion should benefit both the timing and amount of losses when the shift does in fact occur in the portfolio. Declining sales of home office products, the category with highest delinquency rates is shown on slide two should also benefit the portfolio over time.
We continue to evaluate our underwriting standards and may make further changes to reduce credit risk. As mentioned earlier, the Credit Risk and Compliance Committee will direct and supervise an independent evaluation of underwriting standards to validate underwriting processes and results.
Although not our goal or expectation, we believe we could still operate the credit segment profitably and generate an acceptable overall return on capital at a long-term static loss rate of 10% or even somewhat higher. The number and scale changes in our operations over the last several years, including modifications to credit underwriting, credit collection practices and the length of loan terms along with new store openings and our shift in customer mix, has impaired our ability to accurately forecast the timing and expand our provision for loan losses.
For static loss rates to increase significantly from the current trend, delinquency would have to increase as well. We will be providing investors monthly updates for the foreseeable future on greater than 60-day delinquencies until we have more stable and predictable trends.
We expect fourth quarter delinquency to be flat to down compared to the third quarter. In response to the higher-than-expected credit losses, we raised credit prices in some cases.
We eliminated the use of six month interest free programs that are no longer offering 12-month interest free financing programs to a portion of our customer base with lower credit quality. We raised the rates we charged consumers by 200 basis points in some stage.
These changes did not impact sales rate significantly and we’re evaluating other opportunities to increase yield in the future. Over several quarters, these adjustments should add through our yield.
These changes will offset a portion of the effective higher static losses. Turning to our retail segment.
November same store sales were up 0.5%. November, a year ago, delivered 31% same store increase.
A year ago comparisons become easier for each of the next three quarters. November same-store sales of televisions increased 6%.
The Black Friday weekend was outstanding. Television sales trends reversed and TV comps were positive for the weekend with a strong Ultra HD performance.
Ultra HD television is the big winner for us so far in the holiday period. Two curved Samsung Ultra HD televisions at higher sales in one month than any other SKU in the company’s history.
We’re excited to see a new television technology that is generating consumer enthusiasm. With prices below $2000 and larger screen sizes, we could see a meaningful replacement cycle.
On slide three, we show product gross margins by product category for the third quarter. Total retail gross margin percentage for the quarter was 40.6%, an increase of 50 basis points over the prior year.
Furniture and mattresses were 43% of product gross margins as shown on slide four. For the nine months ended October 31st, gross margin percentage was 40.9%.
This is above our long-term goal of 40%. Opening two warehouses in Q1 of 2015 and one more Q3 of 2015 increased warehousing cost as a percentage of sales.
These warehousing costs are included in cost of sales. We made progress improving utilization of these warehouses with the stores open for the year.
Over the next several quarters, gross margins and the benefit from improving utilization of our warehouses as we execute the fiscal 2016 store opening plan without opening any additional warehouses. On slide five, you can see a three-year trend in furniture and mattress sales.
Same store sales of furniture and mattresses increased 7% in the third quarter on the top of the 55% increase a year ago. For our new store sales of furniture and mattresses are about 39% of the total in the quarter.
The share of sales from furniture should increase with the full effect of stores opening this year. Completion of our relocation and remodeling program along with store closures should also increase the share of sales from these categories.
The company set a longer-term goal of 35% of sales from furniture and mattresses. We’re making progress towards this goal.
As shown on slide 6, SG&A other than advertising declined as a percentage of sales were held steady. Advertising as a percentage of retail sales was 6.9%, an increase of 180 basis points from last year.
Advertising expenses increased with the new store openings. We opened 18 stores for the year-to-date period and 12 of these were in separate advertising markets.
Stores opened in Las Vegas, Nashville, Memphis, Knoxville, Greenville, Denver, Florence, Charlotte, Colorado Springs, Jacksonville, Lubbock and El Paso. Many of these markets will have more than one store when mature.
As we build out markets and the customer base matures, we expect advertising expenses to decline as a percentage of sales from Q3 and we expect advertising expenses in Q4 to be lower as a percentage of sales than in Q3. With our product mix trends, advertising will not return to historical lows.
However, advertising expenses in mature markets are about 4.5% of sales today. Retail gross margin was 40.6% this quarter, which includes $0.6 million of under levered expenses associated with our new warehouses.
In total, under levered operating cost related to facility openings totaled $4.5 million this quarter impacting earnings by about $0.08 a share. In the fourth quarter of last year, we opened eight stores including several late in the quarter.
This fourth quarter we have opened three stores all prior to Black Friday and we’ll not open any additional stores in the quarter. Compared to a year ago, cost should benefit from the change in fourth quarter new store opening.
Turning now to our balance sheet and liquidity. As of October 31st, 55% of our $169 million in inventory was financed with outstanding accounts payable.
Inventory was up 23% on a sequential basis while our store count grew 7%. Our inventory churn rate was approximately 4.5 for the quarter.
Inventory levels and churn rates this quarter were impacted by the upcoming holiday season and our plan to spot the supply chain issues related to the West Coast ports. Turning now to slide seven in support of our longer-term liquidity requirements, we issued $250 million of eight year notes in July.
Outstanding debt was $697 million in October 31st, 56% of the outstanding customer receivable portfolio. As of October 31st, we are well within compliance of our debt covenants.
Our cash recovery percentage was 4.94% for the quarter, as compared to a minimum level of 4.49% required under our revolving credit facility. Based on current facts and circumstances, we expect to remain in compliance with our debt covenants.
At quarter end, we had $428.4 million of total borrowing capacity available under our revolving credit facility. We plan to open 15 to 18 stores in fiscal 2016.
We will open stores in markets with existing marketing spend, existing distribution of both. This should allow us to increase profits faster because of leverage in both cost of sales and SG&A.
Execution should be easier as well. Our current plan does not call for opening another warehouse until fiscal 2017.
We’ll continue to pursue opportunities for new locations and we’ll evaluate our store opening plan for fiscal 2017 and beyond as part of our review of strategic alternatives. Finally, I want to take a moment to discuss the departure of Brian Taylor, our CFO, before passing the call over to Mike.
I want to personally thank Brian for his valuable contributions to Conns’ growth over the last several years and wish him the best in his future endeavors. We’d also like to welcome Mark Haley as Interim Chief Financial Officer.
Mark joined us recently from Coldwater Creek and I have great confidence in his abilities, given his host of relevant industry and leadership experience. We are pleased to have Mark in place as the company conducts the search for a permanent CFO.
As we also noted in the press release, with the ongoing review of strategic alternatives and other oversight initiatives being undertaken by the company, the company has decided to withdraw its earnings guidance for fiscal 2015 and is not currently providing earnings guidance for fiscal 2016. Although, we are no longer providing earnings guidance, we plan to provide forward-looking information about our expected store openings, same-store sales and retail gross margins.
And we’ll also be releasing shortly after the end of each month, same-store sales performance for the month. In closing, despite the volatility and performance over the last year, we remain committed to the business and its potential for growth.
The Board and management are taking the steps necessary to ensure future performance returns to expectations. Now, I will turn the call over to Mike.
Mike?
Mike Poppe
Thank you, Theo. In our credit segment, despite improvement in collection execution and tighter underwriting over the past several quarters, we saw delinquency continue to deteriorate and charge-offs accelerate.
Though we have reduced the portion of originations to customers with the credit score below 550 and completely eliminated originations to customers with the score below 525, due to deterioration in scores after origination. The proportion of accounts 61 or more days past due with a score below 550 increased this summer and has maintained that level.
The percentage of customers in the portfolio in total with most recent scores below 550 has decreased since last year. We are seeing an increase in the 60-plus day delinquency rate for those customers.
Conversely, for customers that maintain their score over 550, we have seen the delinquency rate declined year-over-year, providing some evidence of the improvement in collection execution. As a result of the sustained deterioration in the customers’ ability to resolve delinquency despite the changes we have made and the change in our post charge-off recovery process, we increased our allowance for bad debts during the quarter.
The recent delinquency and charge-off trends are shown on slide 8. 60-plus day delinquency increased 130 basis points during the quarter to 10%.
As of November 30th, the 60-plus day delinquency rate was consistent with October at 10% compared to 8.5% last year. The net charge-off rate decreased 110 basis points sequentially to 8.9%.
The decrease was partially due to increased sales of charged-off accounts during the quarter compared to the prior quarter. We expect the charge-off rate to increase in the fourth quarter due to the increase in delinquency and our decisions to stop selling charged-off accounts.
We will manage the post charged-off recovery process in-house as we do it historically. This will result in the deferral of the realization of recoveries over an extended period of time, beyond the 12-month period considered in the reserve as opposed to lump sum payments from a sale of accounts.
We expect to ultimately recover similar if not greater amounts than we were receiving through the sales. The impact of this change was a $7.6 million increase in the bad debt reserve and provision this quarter.
In addition to the underwriting changes we have discussed, we have worked diligently to improve execution in our collection operations. During the fourth quarter last year, the collection operation was overwhelmed by rapid growth in both the portfolio and the proportion of new customers.
With a faster than anticipated growth rates, staffing levels and effectiveness were inadequate to handle the increased delinquency volume. As a result, delinquency and charge-off rates deteriorated.
On a positive note since that time, staffing needs have become more predictable and we have improved our employee retention and agent effectiveness. At the end of October, the portfolio had grown 33% year-over-year, while the number of agents with six months or more of 10-year listed company increased 59%.
Additionally, as the size of the operation has grown, we have added seasoned management talent to the organization and enhanced our collection strategies by adding specialized teams and processes to address higher risk segments of the portfolio. As of today, we believe the team is well-positioned to execute our plan through the holidays and in the tax season, when staffing needs typically begin to moderate.
We also recently engaged two outside consultants to complete independent studies of our collection operations to identify opportunities for improvement in our collection execution. Generally, the studies confirmed our own findings about the drivers impacting our portfolio results and the recommendations were largely focused on improving collection efficiencies as opposed to collection effectiveness.
We are developing plans to implement the recommendations that we believe are appropriate for our business. Turning to the payment rate, it is important to keep in mind that the average age of the receivables impacts the payment rate.
Since the finance contracts have a fixed monthly payment, the payment rate is at its lowest right after sale is completed and the balance of that is highest point. On October 31st, the average age of an account was 8.7 months compared to 8.6 months in the prior year.
Given the similarity in the average age this year compared to last year, the deterioration in customer ability to pay on their accounts resulted in a year-over-year payment rate decline of 12 basis points in the quarter to 4.94% this year. We are encouraged that the year-over-year gap has narrowed from the 40 basis point decline experienced during the first quarter.
Turning to underwriting trends for the quarter as shown on slide 9, 94% of our sales in the quarter were paid for using one of the three monthly payment options offered. The percentage of sales under our in-house finance program was down 2 percentage points from last year to 77%.
The percentage of sales under our third-party rent-to-own options increased 230 basis points, nearly doubling to 4.8%. The approval rate under our in-house credit program decreased 680 basis points year-over-year due to the underwriting and marketing changes made since late in the third quarter of last year.
The average credit score underwritten increased sequentially to 608 and was up 9 points year-over-year, while down payments rose 20 basis points to 3.6%. This is the sixth quarter in a row with a year-over-year increase in the down payment percentage.
During October, we began offering 18 and 24-month no interest programs to high credit score customers previously financed under our program with Synchrony. We originated approximately $3.5 million under these programs during the quarter to customer with an average credit score of 692.
We expect originations under these programs to become a larger portion of our originations and the portfolio balance going forward, demonstrating future delinquency and static loss results. Turning to the financial performance for the quarter, revenues increased largely due to the growth in the portfolio, which was partially offset by the decline in the interest and fee yield 16.9%.
The interest in fee yield decreased by approximately 40 basis points due to the additional provision for losses recorded during the quarter. SG&A expenses for the quarter increased 28% year-over-year also due to the growth in the portfolio, but were down as a percentage of the average portfolio balance outstanding to 8.6% from 9.1% last year and compared to 8.8% for the first two quarters of this year.
The provision for bad debts increased $49 million from the prior quarter to $72 million. This increase resulted from several factors, including 33% growth in the portfolio balance, 12% increase in origination volume compared to the same quarter last year, increased 60 plus days past delinquency due to deterioration in customer credit quality after origination, accelerated pace of realization of credit losses, a $7.6 million reduction in recoveries expected over the next 12 months, due to our decision to pursue collection internal and a $4 million increase related to an 18% increase in balances treated as troubled debt restructurings for accounting purposes.
Interest expense rose $5.2 million on increased borrowing and a higher effective interest rate as the senior notes issued July 1st of this year were outstanding for the entire quarter. We have remained focused on achieving and maintaining appropriate collector staffing levels and improving underlying credit quality at origination and we’ll continue to identify opportunities to improve execution in credit quality.
Before we begin Q&A, I’d like to remind everyone that the purpose of today's call is to discuss our financial results for the quarter and ask that you please limit your questions to our earnings announcement. As we mentioned in the press release, we don't plan to comment further on the strategic alternatives review until the process has concluded.
Thank you all in advance for your understanding and cooperation. Karen, let’s begin the Q&A portion of today's call.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Peter Keith from Piper Jaffray.
Peter Keith
Hi. Thanks.
Good morning, everyone. Thanks for taking the question.
I guess, I wanted to dig first into the bad debt provision that you had in the third quarter close to 24%, which was substantially higher than I think anyone expected? And then the commentary from CEO that does he is going to step down in the fourth quarter.
I guess, can you help us get our arms around what might be one -- fully one-time charges in the third quarter? And then, I know you’re not providing guidance, but when it’s stepping down and assuming, let’s just assume that the delinquencies are stable, what would that provision look like in the fourth quarter assuming that stable trend?
Theo Wright
Yeah. We’re not going to provide as you said guidance on the provision, Peter.
But we do believe that our longer term static losses are in the -- for 2014 originations are in the 9.5% range and we think 2015, we’re hopeful that it decline somewhat from there, but we haven't seen a stronger decline in trend as we would like. And so longer term, we would expect that provision rate would trend more towards that static loss rate.
And that, however, that would be volatile because of the two different methodologies we have for provisioning with TDR accounts and non-TDR accounts, and the impact of growth. So if you think of that static loss rate, longer term, again not talking about the quarters kind of the baseline than the portfolio growth would add to that additionally call it 100 to 200 basis points, something in that range depending on the pace of growth.
And so that’s the trend that we expect to travel towards, but the path could be lumpy because of the different provision methods we have in the timing of experience seasonality of experience of delinquency.
Peter Keith
Okay. And maybe for Mike and just as follow on, was there, I think, you called out several one-time items?
Could you just kind of lay those down again for us to understand what may not be recurring in the fourth quarter with the provision?
Mike Poppe
It is really one-time item that we called out, Peter, and that was a change in the recovery process and we’ve see selling charged-off accounts and that was about an $8 million adjustment to the provision in the quarter to change our expectation. And it’s really just the timing difference.
It’s not our ultimate realization expectation. It’s just a timing difference and when those cash flows will be received.
Peter Keith
Okay. Fair enough.
On the separate question, I guess, I’m intrigue, hoping you could expand upon the 18 to 24-month interest free programs. It sounds like you're actually bringing on prime customers into the Conn’s portfolio that previously would have gone to GE or Synchrony?
Can you help to just clarify what is going on there is kind of interesting?
Theo Wright
Yeah. So what we’ve done is return to historical practice of originating to prime customers with longer-term no interest programs.
So, if you look at Conn's performance for fiscal years prior to fiscal ’13, included some or significant portion of originations to higher FICO score customers with long-term -- longer term no interest programs. So we’re returning to that practice of the FICO scores that we underwrote using those programs.
We’re just short of 700 FICO in the quarter and we expect to continue to do that. And that would -- if you’re comparing to earlier historical periods that would be more comparable to the credit mix in the portfolio that we had.
If we took back -- as an example, if we took back all of the business we do with Synchrony today. The average FICO score underwritten in the portfolio would be in the low 620s, which you could compare to historical periods when we were underwriting with the similar mix of customers.
Peter Keith
Last question for me. The deterioration in oil prices, obviously, may have some impact on the Texas economy.
I know you don’t indicate that there is direct correlation with those jobs to your customer base? But kind of could you help us frame that up in terms of the impact to the Texas economy and maybe what the lower gas prices would be more broadly to your customer base?
Theo Wright
Well, the lower gas prices to our customer base broadly are raised. I mean, they immediately have more disposable income than they had before.
So for our customer base broadly nothing but a positive. For some of the markets that we operate in lower oil and gas prices could have an effect.
I will say that our two primary oil and gas exploration markets in the Eagle Ford and Permian Basin are two of the lowest cost production areas. And so at current prices it could have some impact on employment in those regions but those are likely to be among the least affected oil and gas exploration areas.
Operator
Thank you. And our next question comes from the line of Rick Nelson from Stephens.
Rick Nelson
Thanks and good morning.
Theo Wright
Good morning.
Rick Nelson
Yeah. I think -- all right quite a bit of tightening over the past year, has the fiscal 2014 originations you’ve take are tracking 9.5%, why do you think we are not seeing more meaning improvement in the fiscal ‘15 originations?
Theo Wright
Two reasons, one is some of the changes that we made to tighten underwriting are not really reflected in the portfolio yet. So partly we made those changes in underwriting in steps over the last 12 months and not all of those changes have been reflected in portfolio performance.
Secondarily, as Mike mentioned in his comments, our customer base has been under pressure at least as reflected in a group of those customers declining for lower credit scores and that’s also affecting performance. And I would summarize that response by saying that, although, we didn’t get the desired result from all of those changes that we did in fact benefit portfolio performance if you compare it to what it would have been otherwise if we had made those changes when we did going back a year ago.
Rick Nelson
When you provision this quarter and the allowance for loan losses now it’s hitting at 10.6% of the receivable balance that would seem to be pretty conservative level, particularly with the 8% static loss target out there? If you could comment there and why you are comfortable with an 8% static loss customer?
Theo Wright
Yeah. And just for clarity, Rick, the 8% static loss is the goal.
I mean, we have not articulated that we think accounts in the portfolio today would yield an 8% static loss. What we’ve said is based that our goal is 8% and we’ll make changes to our underwriting overtime to achieve that goal not that we think that the loss in the portfolio on the balance sheet today would be an 8% static loss.
And so if you look at the changes that we’ve made to issue credit to higher FICO score customers, the tightening that we’ve done in a number of other ways. And I think, most importantly, the slowing same-store sales growth rate we believe that those changes should overtime lead us towards our 8% goal.
Rick Nelson
Okay. Got you.
And finally, if I could ask you, I know you reported a credit balance per active account and it’s -- customer can have more than one active account? You could provide some color on where the credit balance is per customer?
Mike Poppe
That we have to -- direct it. Yeah.
This is Mike. And I’ve got the data in front of me.
The balance per customer has risen pretty consistently with the balance we’ve seen per accounts. And so where we are sitting at the end of our October with an average customer balance of about $1,800, I am sorry, average account balance of $1,800, the average customer balance is about $2,300 and the rise overtime has been fairly consistent with the average per accounts.
Rick Nelson
And do you think that is contributing to higher losses?
Mike Poppe
No. And so let’s talk about payments and then the things that have driven the average higher balance in payment.
The payment has, per customer has just like the average per account has gone up about 25% in the last three years, the average per customer has only gone up about 30% from a $100 to $130 a month. And the change in the balance and the change in the payment are two of the key drivers, are the fact that we shortened terms a few years ago.
So, we’ve shorten the period over which the customers paying on the account, improving the credit quality, amortizing the portfolio more quickly should reduce loss severity. And that's driven about 20% of the increase in the payment amount.
And then the fact that the portfolio is much younger today, when it was 12 or 13-month average age of an account three, four years ago, we are at 8.7 months today and that is driving about 20% increase in the balance compared to where we were a few years ago.
Rick Nelson
Thanks a lot and good luck.
Theo Wright
Thank you.
Operator
Thank you. Our next question comes from the line of Laura Champine from Canaccord.
Laura Champine
Good morning. Theo, how do you attribute the move in delinquencies and losses that you have, what do you think is causing it?
And secondly why continue growing the book of business at all or the credit portfolio until you get those metrics under control?
Theo Wright
Yeah. The increase in delinquency and loss is the single biggest driver of those increases is in fact the growth in the portfolio and the growth of originations to new customers that’s the single biggest factor.
And so to the extent that we want to grow the profitability of the business over time, even assuming perfect execution in every element of the business in every other way, we would still have increasing delinquency and losses because of the increasing originations to new customers. So really it's a belief in the business model and its value to consumers.
And although we may need to make tweaks to the model and to the underwriting and fundamentally, we could not grow either on a same-store basis or through new store openings without putting upward pressure on delinquency and losses.
Laura Champine
You strip out the business that would have been Synchrony’s that you're taking on yourself, would your FICO score on originations still be up in Q3?
Theo Wright
In Q3, the originations to customers with higher FICO scores that would normally have gone to Synchrony were immaterial. It would’ve been essentially what we reported for the quarter was really November where that had an impact.
Mike Poppe
There was only $3 million of originations in the quarter to those customers, Laura.
Laura Champine
Got it. Thank you.
Theo Wright
Thank you.
Operator
Thank you. Our next question comes from the line of Brad Thomas from KeyBanc Capital Markets.
Brad Thomas
Thank you. Good morning and just a follow-up on that last question.
The 0% financing, I believe was about 12% of your mix last year. How much of that would you expect to take on as we look forward?
Theo Wright
It will depend on the season, but a rough guess would be something in the range of half of that, maybe three quarters. We used different programs at different times a year and depending on the competitive environment.
So it’s partly dependent on what our competitors were doing and how they predict. Let’s say, half would be as good a guess is any at the moment based on the originations last year.
Brad Thomas
Great. And what do you think the typical FICO score is in that band of financing?
Theo Wright
Bearing for the -- what we booked today, the average score that we have booked in this 18 to 24 months program is just above the 690.
Brad Thomas
Great. And then I just want to ask two questions on the retail side of things.
You still got a gross margin benefit this quarter from mix shift. But it looks like on a category basis, you had declines and for the whole fourth quarter, you are expecting gross margin to be down.
Could you just talk a little bit about what’s changing there from a category perspective and what the longer term outlook could be?
Theo Wright
The impact on gross margins is almost exclusively the impact of the additional warehouses and the under levering of those warehousing costs. And so as -- if you look at the margins before allocation of warehouse costs, just cost, the purchase cost from the vendor, there has been no deterioration in those margins.
So it’s really warehousing cost and as we open additional stores before we utilize those warehouses, we would expect the gross margins to trend back in line with what we saw a year ago.
Brad Thomas
Great. And then just lastly for me, as we think about growth in 2015, what sort of a comp do you think you need to post in order to get leverage of SG&A?
Theo Wright
In order to leverage store SG&A, we would need to have a single low, single digit comp. But I would say that we’re not going to manage the business to our comp level particularly.
So, we are going to continue to look at the overall profitability of the business and not necessarily do whatever is necessary to drive a same-store comp number, a particular same-store comp number. That’s consistent with the comments that we had last quarter that we are going to consider other factors, not simply just trying to draw to a comp number.
Brad Thomas
Got you. Thank you for all the details.
Theo Wright
Thank you.
Operator
Thank you. Our next question comes from the line of Dillard Watt from Stifel.
Dillard Watt
Thanks. Good morning.
Wanted to see if there was any change in new store productivity, it seems like those numbers have come in a little bit below our expectations for a couple of quarters?
Theo Wright
You bet. There are a couple of changes.
One is cannibalization. We have opened stores in Albuquerque, Tucson and multiple stores in Phoenix.
And so those stores that we opened a year or more ago was suffering from cannibalization and in many, if not most instances, that’s item one. Item two is our tightening of underwriting standards has a considerably greater effect on customers that have never purchased from us before.
And so in the new markets, the tightening of underwriting standards has affected revenues more than it has in the mature markets. And then the last one is, we also, going back a year ago, we did have different underwriting standards in the states that allowed us to charge higher interest rates, Arizona and New Mexico.
And we stopped doing that at the beginning of the fourth quarter a year ago. And so that’s also something that's affecting the new store performance.
Dillard Watt
Got you. Thanks.
Maybe a question for Mike next. Do you have any expectations on this particular timeline in terms of difference between recovering the charge-offs yourself compared to the selling them off?
We generally see that the -- from the point of charge-off, the cash collection period, the majority of that will be collected within an 18 to 24 month period but it will build over time.
Theo Wright
Yeah, just a follow on there, so having previously sold accounts, we don’t have an existing pool of charged, previously charged-off accounts to collect from. So it will be as we charge-off accounts over time and build this pool of accounts that we can collect post charge-off that will see those recoveries and that would likely be over an 18 to 24 month period.
Dillard Watt
Got it. Thanks.
And lastly just a point of clarification on another filing this morning. Just wanted to make sure I read that filing right on either your share activity, was that a sale that was under a planned purchase program?
Theo Wright
No. It was not.
It was just an ordinary vesting of previously awarded restricted stock units and the shares were issued to me net of taxes. So, no, there was no trading activity.
Dillard Watt
Okay. Thank you very much.
Theo Wright
All right. Thank you.
Operator
Thank you. Our next question comes from the line of David Magee from SunTrust.
David Magee
Hi. Good morning.
I just want to confirm, relative to the second quarter, are the lending standards the same or have they tightened or loose since the second quarter?
Theo Wright
They are tightened slightly since the second quarter largely through cash option changes.
David Magee
And are your customers in new regions behaving the way your new customers do in your legacy regions?
Theo Wright
They do. Yeah.
So, we don’t see any meaningful geographic issue. The issue is new customers generally wherever they reside.
David Magee
And then with regard to the covenants and the cash recovery ratio, as you’ve gotten closer to that number, do you feel like you still have the full support of banks right now as you go into next year and open more stores, do you have their full support in terms of credit availability?
Theo Wright
The payment rate follows. This is following the typical seasonal pattern and so there is nothing unexpected here and they’ve seen this over a number of years the portfolio performance.
So, I’d say it’s really not any new information to them.
David Magee
Okay. And lastly just to clarify, Mike, you mentioned that the change in duration from account was the single biggest factor as far as the increase in terms of the account balance.
If that’s so, if it’s up 30% year-over-year, would you say 20 points of that just coming from a duration dynamic?
Mike Poppe
Yes. Yes, the under age of the account is the biggest dynamic driving the increased balance.
David Magee
And what do you think, does that goes to over the next 12-months?
Theo Wright
The average age of accounts in the portfolio will increase with decreasing revenue growth rates.
David Magee
Okay. Good enough.
Thank you.
Theo Wright
Thank you.
Operator
Thank you. Our next question comes from the line of Karru Martinson from Deutsche Bank.
Karru Martinson
Good morning. When you guys look at the shift in the FICO score and now taking folks being below 525, is that just all going to acceptance now or has there been a change in advertising to kind of signal that to the consumer?
Theo Wright
There has been a change in advertising since year ago. We are not using direct mail for customers with lower FICO scores, I mean, we are close to that 25.
So partly we have changed the marketing message to those customers and yes, some of that business is going to Acceptance Now. But I would say, that the increase in Acceptance Now business that we have seen compared to a year ago was far more due to increasing effectiveness both on the part of Acceptance Now and Conns than it is to increasing numbers of declining customers.
Given the really low closing rate that we see with those customers that the increasing number of declines cannot be possible as an explanation for the increase revenue with Acceptance Now.
Karru Martinson
Thank you very much.
Theo Wright
Thank you.
Operator
Thank you. Our next question comes from the line of Andrew Hain from Baird.
Andrew Hain
Hi. In your press release you had mentioned changes to the marketing strategy last year and you’ve lapped those.
For those of us who are new to the story, what were those changes?
Theo Wright
A year or more ago we began to communicate to the consumer more directly the availability of credit. And so if you think of a customer, typical Conns customer, if we communicated to that customer the price and the product that was not enough information for the customer to take action, because they didn’t have available funds to complete the purchase.
So we began to communicate more directly the availability of funds in addition to price and product. We use more direct mail, more television advertising to communicate that and as a result, we generated a lot of business, significant growth with customers who never purchase from us.
We have been able to sustain that level of business. It wasn’t a one-time increase or a pull-forward, but we are lapping those marketing messages from a year ago.
Andrew Hain
Okay. Thanks.
And then just your new store performance, I want to touch on that again, I assume that, the decision to open a stores made months or quarters in advance, you have certain expectations, seems like you have tightened credit standards more recently in the last couple of quarters, maybe that was a deviation from where you had your standards when you planned to open the stores? I am just trying to figure out, if the change in credit standard is impacting sort of what your expectations for the new store performance was back when you made the decision or is it making difficult -- more difficult I guess for those to meet your expectations?
Theo Wright
No. Those stores that we opened year or more ago opened at above average productivity for the company, we wouldn’t expect that to be the case anymore for a number of reasons.
But all of those stores are well above breakeven contributing to profitability almost immediately. So we wouldn’t change any decisions that we have made in store locations.
I think they would all be validate with our current underwriting. What we will change though is that the trend of sales when we opened.
So we are more restricted on originations to new customers. So the store at opening and in its early months or even year of operation will not have the same level of revenues, but is that repeat and referral business builds overtime, we expect will end up in the same place.
It will just take us a little longer to get there rather than opening up incredibly strongly the day we open the doors.
Andrew Hain
Okay. Great.
And just lastly, with your today, I think your debt that you issued back in July or June is there -- like those bonds are off probably 20, 25 points from par. Is there any interest or anything preventing you guys from potentially purchasing bonds in the open market?
Is your desire to do so or you eluded?
Theo Wright
Yeah. At this point, we don’t have any plans to repurchase bonds.
Along with all elements of our capital structure that something that we would evaluate as part of our strategic alternatives process. But at this moment we don’t have an intention to repurchase those bonds.
Andrew Hain
Okay. Great.
Thanks a lot.
Theo Wright
Thank you.
Operator
And thank you, our final question for today comes from the line of Daniel Gurvich from Beach Point Capital.
Daniel Gurvich
Good morning. Thank you for taking my questions.
Just a quick clarification. In the press release you have noted that the interest and fee income yield has compressed 90 bps because of provisions on uncollectible interest.
So would the uncollectible interest be reflected in the lower yield and then that provision is entirely related to credit losses on the principal, is that the right way to look at it?
Mark Haley
That’s right. Any provision and reversal of yield goes against the interest income line and then the provision for bad debt is purely for principal balance.
Theo Wright
And the contractual yield is actually up.
Mark Haley
Right.
Daniel Gurvich
Due to the various initiatives that you mentioned earlier to increase rates that’s on market.
Theo Wright
Yes. And the increasing issuance to consumers in States that allow us to charge higher rate on those debt.
Daniel Gurvich
Okay. Thank you very much.
Theo Wright
Thank you.
Operator
Thank you. And that concludes our question-and-answer session for today.
I would like to turn the conference back to management for any closing comments.
A - Theo Wright
Thank you for joining on today’s call.
Operator
Thank you. Ladies and gentlemen, thank you for your participation in today’s conference.
This does conclude the program and you may now disconnect. Everyone have a good day.