AAN
#Thank you, and good morning, everyone.
Welcome to our conference call to discuss Aaron's second quarter results, which were released today.
All related material, including Form 8-K, are available on the company's Investor Relations website, investor.
aarons.com, and this webcast will be archived for replay there as well.
Before the results are discussed, I'll remind investors about the safe harbor statement.
Except for historical information, the matters discussed today are forward-looking statements.
As such, they involve several risks and uncertainties, and could cause actual results to differ materially from those predicted in Aaron's forward-looking statements.
Please see our SEC filings for certain risk inherent in a business that may cause actual results to differ.
Forward-looking statements that may be discussed today include Aaron's and Progressive's projected results for future periods; the update to our outlook for 2017; the benefits we expect from our acquisition of the store operations of our largest franchisee, SEI; Aaron's strategy; and other matters, including those listed in the forward-looking statement disclaimer in our earnings press release published today.
Listeners are cautioned not to place undue emphasis on forward-looking statements, and we undertake no obligation to update any such statements.
During this call, we will also be referring to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net earnings and non-GAAP EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies.
These non-GAAP measures are detailed in the reconciliation tables included with our earnings release.
I will now turn the call over to Aaron's CEO, <UNK> <UNK>.
Thanks, Kelly.
Thank you for joining us this morning.
We're very pleased with our performance in the second quarter.
Non-GAAP earnings per share increased 15% on a gain in total revenues and total customer count rose 3%.
We've raised our full year guidance to account for solid performance across the business, and we continue to invest to strengthen our leadership position in the lease-to-own industry.
Progressive continued its strong momentum in the second quarter.
Invoice volume rose at the fastest pace in 2 years.
Growth is being driven by diverse mix of retail partners, and the lease portfolio continues to generate strong performance.
I couldn't be more proud of the team for achieving these outstanding results.
We're encouraged about the progress we're making in the Aaron's Business.
The team has done an outstanding job to lift overall execution, and we believe there are multiple opportunities for further improvement.
In fact, we're accelerating investment in several of the initiatives we discussed on our last call.
These include investments expected to improve the customer experience, drive operational excellence and optimize our product and service offerings.
As announced this morning, we've acquired one of our most successful franchisees, SEI.
The franchisee operates in attractive markets, primarily in the northeast.
It has a talented team of multiunit and store level operators with a long track record of success.
The business has consistently been a top-tier performer in our entire system.
And the team has developed best practices that we believe can be rolled out to the broader base.
This acquisition, along with the investments, underscore our confidence in the direct-to-consumer model.
I would personally like to thank SEI founder, Charles Smithgall; and CEO, Chas Smithgall for their many contributions to Aaron's over the past 22 years.
The Smithgalls brought tremendous energy and insight to the company over the years.
Along with Dave Edwards, they built a fantastic team and business, which we are excited to operate into the future.
So thank you, Charles and Chas, very much for your partnership.
We wish you the best of luck in the future.
Overall, we're really pleased with performance in both businesses in the quarter.
We've assembled an outstanding team and believe we have the financial capacity to continue to pursue our strategy.
With that, I'll turn it over to Ryan to discuss Progressive.
Thanks, <UNK>.
Progressive had an excellent quarter, with record results driven by a diverse mix of verticals and strong lease portfolio performance.
Total revenue increased 25% to $373 million.
Invoice volume rose 32%, driven by strength in new doors.
Furniture, mobile and jewelry experienced particularly strong growth, and we had solid gains across regional and national partners.
Active doors increased 37%, bringing the total number of doors that completed a lease with Progressive during the quarter to just over 19,000.
Invoice per active door declined 4.3%.
Declines in invoice per active door moderated in the quarter due to strong performance from new and existing doors.
EBITDA grew 20% and reached 13.4% of revenue.
Financial performance reflected strong invoice growth and increased operating efficiency even as we continue to invest in people and systems to support current and future growth.
The lease portfolio is performing extremely well.
Bad debt expense was roughly flat with year ago levels and write-offs were 5.5% of revenue.
Both bad debt and write-offs are on the lower end of the ranges we target, and we continue to have excellent visibility into the performance of the lease portfolio.
We've raised our full year outlook to reflect strong lease performance and the conversion of the pipeline ahead of expectations.
New retailer relationships represent significant opportunity for future growth and underscore the strength of the lease-to-own value proposition for both customers and retailers.
We remain excited about the large uncertain market and optimistic about our ability to continue to convert those opportunities.
I'll now turn it over to Douglas for an update on the Aaron's Business.
Thanks, Ryan.
The second quarter reflected further progress on initiatives to improve operating efficiency and increased profitability.
Adjusted EBITDA increased as a percentage of revenue by 100 basis points to 10.8%.
Cost control, improved lease margin and better customer retention rates all contributed to the result.
Total revenues were down 10.7% and were impacted by a lower store count for the quarter.
We closed 62 company-operated stores in the period and ended the second quarter with 10.5% fewer company-operated stores than a year ago.
Same-store revenues were negative 8.1%, and same-store customer accounts decreased 4.8%.
As in the first quarter, churn in the portfolio, delivery activity and average ticket price were better-than-expected.
We've completed a significant amount of organizational work to effectively support our direct-to-consumer strategy, and the investments we are making are starting to pay off.
The second quarter benefited from lower store and store support center costs and greater efficiency in our inventory supply chain.
Lease margins improved as we optimized promotional activity, and the ongoing focus on collections process resulted in year-over-year improvement in merchandise write-offs.
Improved operating discipline and a more systematic focus on analytics is enabling the team to better attack opportunities in the business.
As we outlined in the earnings release, our increased outlook includes some additional investment in people and technology to enhance our customer experience.
Lastly, I'd like to reiterate how excited I'm about the SEI acquisition, in particular the opportunity to work with Dave Edwards and his team.
Dave has one of the best track records in the industry of operating a large-scale, multiunit lease-to-own business.
Adding a team of this caliber will be a huge asset for the Aaron's Business.
I'll now turn it over to Steve to discuss the financials.
Thanks, Douglas.
Now I'll turn to the financial details for the quarter.
Revenue for the second quarter of 2017 were $815.6 million, an increase of 3.3% over the same period a year ago.
Net earnings for the quarter declined 5.6% to $36.3 million versus $38.5 million a year ago.
Net earnings for the second quarter on a non-GAAP basis were up 12% to $48.5 million compared with $43.3 million for the same period in 2016.
Earnings per share, assuming dilution for the 3 months ended June 30, were $0.51 compared with $0.53 for the same period in '16.
Diluted EPS on a non-GAAP basis for the quarter increased 15.3% to $0.68 in 2017 versus $0.59 in 2016.
Adjusted EBITDA for the company was $95.7 million for the second quarter of this year compared to $88.2 million for the same period last year.
At June 30, 2017, the company had $260.3 million of cash on hand compared with $308.6 million of cash at the end of 2016.
Cash generated from operating activities was $115.6 million through the first 6 months of 2017 compared with $325.5 million in 2016.
The difference was driven primarily by $181 million change in cash taxes paid between the 2 periods.
Through normally scheduled amortization payments, we reduced our total debt by $97 million since year-end.
The company has no further scheduled debt repayments through the balance of the year.
At the end of June, we had a net debt-to-capitalization ratio of 7.2% and no outstanding balance on our $225 million revolving credit facility.
Regarding the acquisition announced earlier this morning, as we stated, we used cash on hand to fund the approximately $140 million purchase price.
Including one-time transition and integration-related expenses, we expect the purchase to contribute approximately $0.05 on a non-GAAP EPS basis in 2017.
As stated in our updated outlook, this positive impact will be offset by additional investments in strategic initiatives within the Aaron's Business.
We remain conservatively capitalized following the acquisition with a pro forma net debt-to-capitalization of approximately 14.5%.
The tax rate in the quarter was 36.2% versus 37% in the year ago quarter.
The company did not repurchase any shares during the quarter, and we currently have authorization to purchase an additional 7.9 million shares.
Consolidated customer count increased 3% to 1,622,000 at June 30, 2017, up from 1,571,000 a year ago.
The company has updated its outlook for 2017 as follows.
On a consolidated basis, we expect revenue of approximately $3.33 billion to $3.44 billion compared with the previous outlook of $3.1 billion to $3.31 billion; adjusted EBITDA of $355 million to $378 million compared with the previous outlook of $320 million to $353 million; GAAP diluted earnings per share in the range of $2.10 to $2.30 compared with the previous outlook of $1.85 to $2.10; and non-GAAP diluted earnings per share in the range of $2.45 to $2.65 compared with the previous outlook of $2.15 to $2.40.
Note that the increased outlook includes higher revenues and adjusted EBITDA for both the Aaron's and Progressive businesses.
I'll now turn it back to <UNK> before we move on to Q&<UNK>
Thank you, Steve.
Thank you for your interest in Aaron's.
We're pleased with our results for the second quarter and excited about continuing to innovate our business to provide more customers access to quality products for their homes and families.
That concludes our prepared comments.
I'll now turn the call back to the operator to open the lines for Q&<UNK>
Thanks for the question.
As you know, I think from the timing of those press releases, both the larger accounts that were made public, Conn's and Signet, were weighted toward the end of that quarter.
I think we barely started that rollout with Signet at the very, very end of the quarter.
So the results in Q2 would not reflect much in the way of door growth there.
But certainly, pleased to have those on board and happy with the way they're ramping.
I think, it ---+ I wouldn't say there is any material change from where we've been in previous quarters.
It tends to be segmented as it has been in the past among different behavior at the regional level versus the national level.
And I'm certainly happy with the success we've had to date.
Great strong door growth in the quarter.
Super proud of the team for making that happen.
Really happy with the folks, the retailers we are working with today and really excited about the pipeline.
<UNK>, yes, this is Steve.
And we're very active in Woodhaven.
We've got the ability to ---+ they are very nimble and flexible down there, but we're also diversifying that base by selling to some outside retailers and that's growing very nicely for us.
So we continue to believe Woodhaven is a strategic asset for us, and we'll obviously pay attention to it and be mindful of it, but it's still a big part of our future plans.
<UNK>, it's <UNK>.
Thanks for the question.
Yes, in terms of the timing, I think it was opportunistic for both sides.
Honestly, SEI is a business we wanted to own for some time for a lot of the reasons we discussed in the press release and I can talk about as well.
And I think the Smithgalls, it was a tough decision for them.
They've been at it 20-plus years, but they believed it was the right time for their team members, their customers and themselves.
So I think it was just kind of an opportunistic situation from both sides.
Kind of from a strategic standpoint, that deal there ---+ it's a unique business.
So SEI is unique in its scale, unique in the fact that it occupies a single large region for us in the northeast, where we have a limited presence prior to the acquisition.
And given ---+ kind of we think about it strategically in 2 big buckets.
One is there is a big market opportunity out there for our lease-to-own products generally, so our omni-channel offering.
We think 25% to 30% of the U.S. consumer population are our potential customers.
And owning all of the assets in the right market, whether it's stores, virtual offering, e-com, mobile, supply chain that gives us more control operationally, and it gives us the flexibility to innovate our business model in whatever way the market dictates over time.
And as we've talked about, we believe the market is large, it's underpenetrated, and we need to continue to innovate to serve more customers.
So we believe owning all the assets in those markets will give us the best chance to do that.
And then from a SEI perspective, they are unique in a sense that they occupy a single large footprint.
And they're a really profitable business.
If you look at that business, it's about 100 stores ---+ little over 100 stores, which is the same size as our 10 operating divisions, they're all about 100 stores.
And interestingly ---+ and they typically occupy 1 region.
So we're basically bolting on a new division.
The good part about this is SEI as our newest division will be on a LTM basis our most profitable division.
So they are more profitable than any of our other 10 divisions.
And the exciting part about it is we're getting that plus we're getting the team.
So we're getting Dave Edwards who has been doing this a really, really long time, one of the best operators in the industry and the team of multiunit and store level managers that he put together.
So we feel like they're going to be fantastic for operating this newest division for us, but also pollinating into other parts of our business, where we could use some of their magic dust that they've sprinkled over the northeast.
So we're looking forward to bringing them in and couldn't be more excited about it.
And the Smithgalls are incredible people, have been great partners and will remain great friends of ours and the company.
Sure.
I think generally, as we think about the direct-to-consumer business, which we consider to be our stores and our e-com platform, I mean, we're really bullish about the business.
We're servicing a huge market.
And the way we see the market it's about 30% of the U.S. consumer base and ---+ that's both banked, underbanked and unbanked.
And we spend a lot of time listening to our customer over the last quarter or so.
We've been investing a lot of time in research.
And we think we've got a lot of opportunities there.
So we've begun the journey of investing in both people and technology to build a better platform for our new customer experience and this is a omnichannel platform.
The main focus of it is really around a couple aspects.
One is speed of service.
So we think there's a big opportunity in our underwriting and our approval process to approve more customers.
Second, we really think there's an opportunity in expanding our product selection.
So we're investing in platform so we can offer more opportunities to our customer, both online and in our stores.
And probably one of the biggest opportunities we have is our e-com channel.
And we're really thinking about e-com as a platform where we can leverage the millennial customer that we're underserving right now and really getting more access to the customer base in this 30% that we're not touching right now.
We know that our customer is aging, and we think there is an opportunity to go after that customer more aggressively.
And we're investing in that right now.
And I think putting a wrapper around it, lower cost to serve.
If we can serve this customer base at a lower cost in a more efficient way, where they can self-serve and we can leverage our back-end logistics and collections processes, we think we win.
So we're working on all those things.
We're kind of in parallel paths and we're investing in that and that's the investment that you're seeing in the second half of our guidance.
Yes, <UNK>, this is Steve.
Yes, we're not really disclosing any other ---+ of the terms of the deal.
There will be disclosure in the subsequent Qs, but at this time, it's a $140 million purchase price approximately and that's where we're leaving it.
Well, what I would say there is, there is some puts and takes because, as you know, we've got nonretail sales that are derived from our franchisees and ---+ with 100 stores and that's recognized on the face of the income statement versus an intercompany transfer when it's a company-owned store.
So that revenue, which is low margin for us, but that revenue would go away and then the royalty revenue would go away, offset by obviously the full storefront revenue.
So there is an impact in the back half on the revenue for those 5 months, but ---+ and it's included in the increased revenue guidance, but we're not saying exactly what it is.
Well, I can ---+ this is <UNK>, <UNK> ---+ I can address it; and Douglas, feel free to jump in.
I think there is limited overlap.
This is a market where they are primarily ---+ SEI is primarily in the northeast, and there is not a tremendous overlap with company-owned stores.
Having said that, we will put the ---+ we will use the same process of kind of evaluating stores on a go-forward basis and rationalizing stores and markets at SEI as we've done at the company stores in the past.
So we'll expect that process to start once we get this deal closed.
So that would be the answer to the first question.
And in terms of store count, I don't think we've ---+ I don't know if you've provided any more guidance on that.
We're going to continue to look at the ---+ every quarter, we really look at our footprint and broadly and just we're trying to be smart.
Look at spots where leases are coming due.
Or if not, where it makes sense to close the store early or move the store.
And we are just going to continue that process going forward, but I don't think we've given any more guidance on that.
It's great to see that it's coming from both areas of the business.
Existing doors are performing extremely well.
There has been great growth out of doors that were existing on the platform previous to the quarter as well as great expected growth coming from those new businesses.
We're seeing new doors mature into increasing levels of productivity, perhaps even ahead of the pace we expected, which is great.
There's obviously a lot of hard work being done by the teams on both sides, our teams and the teams at those retailers on ramping those doors, but they've done an excellent job.
And what we see in the quarter that accelerating invoice growth is really the function of onboarding a lot of new doors as well as making sure those doors are increasingly productive and that's what we're seeing.
The pipeline remains robust.
I'd say the revised outlook is a function of the accounts we have and know of today rather than expecting significant contribution from unknown accounts in the remainder of the year, but we're very happy with where we sit today.
Yes, sure.
And Ryan, feel free to jump in.
I mean, as you know, we have 20-plus kind of hubs around the country, where we are ---+ it's Progressive employees that are returning product from customers and pushing, QA-ing it, bringing it back to our Aaron's stores.
Certainly, with the acquisition, it improves our supply chain infrastructure from that perspective, it's a reverse logistics infrastructure I should say in the northeast, that's an opportunity for us up there.
In general, I would say it's been kind of consistent.
We've gotten good performance out of it.
It continues to grow and I think there's more opportunities down the road.
But it's not been, I wouldn't say, a focal point for the Progressive business.
I think they've done a great job while managing lease portfolios without it and it's been kind of an added plus in addition to the great analytics work we've done there.
I don't know Ryan, what comments you have on that.
We kind of see that as opportunity down the road, I think.
Yes, sure thing.
So I think we had mentioned that we onboarded a lot of new doors in Q3 of last year and we had door growth, obviously, in Q2 as well, but significant increase in Q3.
So we haven't quite started to lap those yet.
But what has happened is that those doors that were onboarded have had time to mature and we're just seeing increasing levels of productivity from those doors, which is a great sign.
So obviously, with that increase in productivity, once we actually start to lap the count in Q3, we expect to see continued improvement in that metric.
What's also helping is that existing doors are performing well also.
So we're seeing increasing levels of productivity from increasing doors, which is helping to support that metric.
Yes.
Yes, this is [vague].
It's Douglas.
We've seen a firming up of our ---+ I would say a lessening of our decline in deliveries, which is good.
So coming out of the end of the second quarter, there has been some strength there.
And then I mentioned before lower churn rate that's also given us a more positive outlook and our collection rates are obviously improving as well.
So as we look at comps going forward, we're seeing improving comps throughout the remainder of the year and I would say sequentially improving comps from the third to the fourth quarter.
Now in terms of the broader market, I think we're just seeing what you're seeing in the paper.
Our customer hasn't changed.
We just think that we're collecting better on the customer and there seemed to be a little firming on deliveries.
Yes, I don't think ---+ <UNK>, I don't know from a macro standpoint that we have any great insight.
I mean, it feels like there is still a lot of credit availability out there in general.
But I think other than just kind of on the ---+ we don't see that specific; Progressive probably sees it a little bit more than Aaron's directly given that they are in the stack along the other finance providers.
But I think in general, that's been the case for a while.
So I don't think we have seen a significant change there.
I think just referencing the response we discussed earlier, I think what Progressive has seen is very much in line with expectations and that sort of falls nicely within the ranges that we would expect to see in lease pool performance.
The 5.5% write-offs, which is sort of a credit quality metric or lease portfolio performance metric we share is if anything maybe a little low, but we're happy with what we're seeing.
Sure.
I mean, in terms of kind of capital allocation, capital structure, we're not changing our thoughts on capital allocation.
If you look over the past 3 years, we've taken a pretty balanced approach to our uses of capital.
We've made acquisitions, we've invested in our business and we've returned capital through dividends and share buybacks.
And going forward, we expect to maintain a balanced approach.
We do want to maintain our conservative balance sheet.
It's been a weapon ---+ strategic weapon for us in terms of giving us the flexibility to be opportunistic and as was the case this most recent acquisition.
So following this acquisition, we're going to continue to be conservatively capitalized.
Our net-debt-to-cap kind of pro forma for the deal is less than 15% and the businesses continue to generate cash.
So we feel like we're in a good spot ---+ we continue to be in a good spot from a financial flexibility standpoint and feel good about being there longer term.
Thank you.
Thank you so much for your interest in Aaron's.
We appreciate your participation on the call and look forward to updating you on our next call.
