Q2 2020 Aaron's Inc Earnings Call

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question answer session.

I will now turn the call over to Mr., Michael Dickerson, Vice President of corporate Communications and Investor Relations for parents Inc. you may begin your conference.

Thank you and good morning, everyone welcome to the Aaron's, Inc. Second quarter 2014 earnings Conference call.

Joining me. This morning are John Robinson, Aaron's, <unk>, President and Chief Executive Officer, Brian <unk>, Chief Executive Officer aggressively.

Let's see the.

The parents business.

Michael Chief Financial Officer, frozen and strategic operations.

Well errands incoming interim Chief financial Officer.

Many of you already seen a copy of our earnings release.

Our press release announcing the expectations operational progress and the parents business into two independent publicly traded companies certain management changes.

All of those press releases were issued this morning.

On our Investor Relations website at investors that they're stuck.

During this call certain statements we make forward looking.

I want to call your attention to our safe Harbor provision forward looking statements that can be bought the Bernie.

Safe Harbor provision identifies risks that may cause actual results to differ materially from the cops are forward looking statements.

Also please see our form 10-K, you run at December 31, 2019.

Q.

Quarter March 31 2014.

Your description of the risk related to our business that may cause actual results to differ materially more forward looking statements.

There's a caution out the place undue emphasis.

And we undertake no obligation to update any such statements.

On today's call, we'll be referring to certain non-GAAP financial measures, including the EBITDA and adjusted EBITDA non-GAAP net earnings and non-GAAP bps, which have been adjusted for certain items, which may affect compatibility or performance.

These non-GAAP measures are detailed in the reconciliation tables included without hurting true.

The company believes that these non-GAAP financial measures provide meaningful insight of the company's operational performance and cash flows and provides inspectors to help investors facilitate comparisons of operating results for prior periods and it was just stopped and understanding the companys ongoing operational performance.

I'll now turn the call John Roberts.

Thanks, Mike and thank you all for joining us today.

Let me begin by expressing my gratitude to the many outstanding team members throughout Progressive Aaron's business Woodhaven in five whose commitment perseverance and dedication has been extraordinary during this difficult period.

Despite the continuing habich caused by the cobot 19 pandemic.

Businesses performed well with the past few months, resulting in strong second quarter financial performance.

In the quarter the company generated adjusted EBITDA of $130 million adjusted earnings per share. The dollar 18 cents well ahead of our expectations.

The company's performance was largely driven by strong customer payment activity reduced operating expenses and more conservative decisioning.

Business also generated substantial cash in the quarter ending June was 313 million on the balance sheet.

Given the tremendous amount of uncertainty in the market. We will continue to maintain a conservative stance with respect to how we're managing the business.

Now I'd like to discuss the decision to separate the business into two independent public company.

Operating has been an idea that management and our board I've spent a significant significant amount of time and resources analyzing.

After thoroughly considering our options we believe separating the businesses is the best path to increasing long term shareholder value.

Well the combination of the two businesses make sense in 2014.

Today, we believe each business can chart, a path to greater growth in earnings knowledge.

Over the past six years, Walt progressive and the air business have been made it separately.

The teams have shared important technology and best practices, making both business it's stronger.

For example, progressive Decisioning technology enabled aarons dot com to be the first and only end to end transactional we used to own E commerce business at scale.

And most recently facilitated the launch of centralized decisioning across all U.S. company owned Aaron's stores.

Conversely, Progressive has created a return logistic system developed from the Aarons business.

And benefited from the scale of a larger public entity. It grew its retail partner base to its national scale today.

As we look ahead, we believe the benefit of ongoing synergies to businesses does outweighed by the opportunities created by each business independently pursuing it's Tom strategy with focused management.

We believe progressive has the management team infrastructure and scale to continue capturing the large unserved virtual based on market with its profitable in capital light business model.

Parents business, having been significantly transformed over the past five years is well positioned to continue consolidating and repositioning it store footprint.

Which coupled with aarons dot com is expected to provide a foundation for future earnings growth and positive free cash flow.

In short we believe both businesses are well positioned to standalone around and now is the time to separate them.

As you saw the separation announcement released earlier today, we will maintain significant executive management continuity.

Gross lending and his team will continue to lead the Arabs business and I will serve as chairman of the errands Board.

A progressive Steve Michaels will take over as CEO and Ray Robinson, our current chairman well continue to lead to substantial experienced a progressive that's chairman.

As part of this next step for the businesses Ryan Woodley has decided that now at the time heart.

And it's been outstanding executive partner for me and leader for Progressive Quadrupling the business. During his tenure as CEO well also building the infrastructure to support it strong growth trajectory.

Well why and will be sorely missed one of the truest test of a great leaders the team he or she has built to perpetuate the business into the future.

And the management team at Progressive is outstanding.

There's no question, Ryan will be leaving progressive much stronger than when he started for that we're truly grateful.

So Ryan was the sadness that we see you go on behalf of all of US the Aaron's and progressive we very much appreciate your leadership dedication and performance and wish you the very best in your future endeavors.

Steve Michaels is the logical choice is the next leader a progressive Steve if they're not trusted business partner. The last several years and has performed at a very high level wasn't executive with multiple operational financial and strategic leadership responsibilities. Most recently as CFO and president of strategic operations.

Steve has a unique combination of strong intellect.

Outstanding Executive judgment, and deep and broad based experience that positions them well to lead progressive.

He knows the progressive business in fact, Steve was the architect of the Progressive acquisition for Aarons back in 2014.

And as remain close to the business ever since.

Even the progressive management team have worked together for a number of years and I'm confident this transition into the CEO position will be smooth.

Overall I couldn't be more excited for Steve to have this incredible opportunity. It's certainly earned.

Partnership a Blake Wakefield who's been instrumental to the company's outstanding performance since 2013, and the rest of the progressive team I'm confident Stephen do an outstanding job as Progressive next CEO.

In conclusion, it's an exciting time for our company due to our recent performance, but more importantly, because of the future opportunity for both businesses.

I'm really proud of the teams that Aaron's progressive woodhaven in five for their continuing commitment to serving our customers.

Fight significant challenges over the past few months.

The operational financial performance the teams delivered in the second quarter was outstanding.

Well done team. Thank you.

I'm equally proud that we're in a position to separate the businesses into two public companies.

This value creation opportunity would not be possible without the outstanding work of the progressive leasing team to grow the company so significantly over the past six years and the parents business gene transforming it into a more modern competitive company over the same period.

I'm excited for the opportunities ahead for the teams and I'm optimistic about the future for both businesses.

Now I'll turn the call over to Ryan to discuss progressive second quarter performance in recent trends.

Thanks, John.

It has been the greatest joy in my career work alongside the teams in the past seven years, including last five and a half year as a CEO.

I'm tremendously proud results, we delivered for our shareholders partners.

Millions of customers, who serves I want to thank John for recruiting need to progress it back in 2013, and serving as a mentor to many years.

In total the business has grown over transacts during our time together, providing enlist opportunities for personal and professional grade.

I also want to thank my leadership teams, where do you like Wakefield, our president and Chief revenue Officer.

Donor co founder and Chief Innovation officer, the significant growth the progressive over the years as a direct result of their expert knowledge and leadership.

Finally, I'd like to express my gratitude to the thousands of employees are progressing for their outstanding contributions to the company success and continuing commitment to our mission.

As we entered the second half a year or results continue to be a testament generic efforts I could not be proud of the progressive cheap our partners in the outcomes that together, we generate especially in the context of the current environment.

Well, we continue to outbreak primarily from home the team's execution. During this time is that exemplary.

We are generating more revenue I'm less overall spend as reflected in the lower absolute doors of as gene expense relative to the same period last year, resulting in 180 basis points year over year assuming research.

We are encouraged that many of our retail partners have reopened there. So we're pleased to deliver improving trajectory of invoice volume performance during the quarter from a low point in April where invoice declined 21% year over year, two a year over year increase of 2.6% May 9.4 person Jim.

Even as many retailers across the country experienced Apache challenges and we're not only reopened.

Revenues for the second quarter over 589.7 billion, an increase of 14.2% compared to second quarter 2019.

Revenue performance was driven by higher year over year portfolio balance entering the quarter as was higher incidences of 90 day buyouts, which we believe resulted primarily from the government stimulus package.

Active doors declined 3.9% during the quarters retailers temporarily closed many locations as well as limited operating hours and in store traffic in response to the pandemic.

Invoiced per active door increased 1.7% due to a slight shift in mix toward higher volume locations.

Gross margins declined to 28.7 per cent compared to 33.2% in second quarter 2019.

As we mentioned in our two previous calls we expected a meaningful declining gross margins in the first half 2020, resulting from the significant acceleration in voice growth, we experienced with the onboarding of new National Regional partners.

Definitely government stimulus and enhanced unemployment benefits during the second quarter increased early buy rate significantly effectively creating a dynamic into a second tax refund season for our business in the corner.

While 90 day BYOD transactions have more gross margins they represent an important component or the overall value proposition for customers and retail partners.

<unk> expenses were 10.5% of revenues in the quarter compared to 12.3% prior year period, an improvement of 180 basis.

As we mentioned on our first quarter call until we have better visibility into the broader economic outlook. We are closely managed volume driven costs reduced discretionary spend while preserving our ability to continue to execute at high levels across all areas of the business.

Turning to portfolio performance measures write offs were 6.1% revenues matching four year lows for the second quarter period down from 7.6% in 2019.

This decline in write offs reflects strong customer in activity as well as changes made late in the first quarter door at least decision.

As John mentioned earlier, there remains uncertain market related the pandemic future government stimulus and overall future economic conditions as such we had not reverse any of the Cobiz 19 specific reserves, we recorded in the first quarter.

EBITDA was 70.7 million in the second quarter, an increase of 3.6% compared to second quarter 2019.

EBITDA margins were 4.0 personnel.

Compared to 13.2 person prior year due primarily to lower gross margins, partially offset by a reduction in my house nest you next sensors.

To summarize progressive best performed at a high level trends pandemic generating strong revenue growth and invoice volume nearly in line with our your levels. Despite significant door closures by many of our largest retail partners.

Well invoice volume has begun to rebound from the April lows, we have maintained a conservative posture as it relates to cost management and decisions, which is producing high productivity on SGN, a span and low levels of write offs.

In closing I'd like to thank all the employees a progressive for their tireless commitment to serving our customers. The combined efforts of the progressive team over many years I've been able to company to take this exciting next step as an independent publicly traded business ably led by Steve and the rest of the executive leadership team I'm.

Very optimistic about the future progressive and look forward to following the team's success.

I'll now turn it over to Douglas for an update on the parents business.

Thanks, Ryan first let me say I'm excited to lead the parents business into the next chapter and acknowledge this would not be possible without the extraordinary dedication and hard work of the entire Aarons organization.

From our leadership team to our dedicated team members in our stores our store support centers and it would haven.

Made tremendous sacrifices throughout this pandemic.

I could not be more proud of the team's performance.

Well the second quarter ended June Thirtyth 2020 revenues were 431 million a decrease of 2.8% from the second quarter 2019, primarily due to a lower store count a smaller lease portfolio per store to begin the quarter and lower deliveries due to the temporary close.

Sure our showrooms, partially offset by strong customer payment activity.

As of the ended the quarter, we had nearly all of her aarons showrooms open having begun our phase three opening in late April.

Same store revenues were up 1.4% and the second quarter.

This increase was due primarily to strong customer payment activity, including higher early payout revenue and retail sales, which we believe were partially triggered by the government stimulus package.

Total recurring revenue written into the portfolio declined 13.7% in the quarter due primarily to the impact of showroom closures and more conservative least decisioning, but in stores and on Aarons Dot com.

Within the quarter recurring revenue written volumes rebounded from april's low down 35% year over year to low single digit declines in May and June.

During the quarter E com recurring revenue written increased 16.9%.

Bite being negatively impacted by lower inventory availability and more conservative leaf positioning.

As mentioned on last quarter's call in April 2020, we rolled out centralized least decisioning and all U.S. company owned stores.

The ability to evidently decision all customers regardless of channel as a significant milestone for the Orange business, because we expect it will allow us to better control lease portfolio risk increased labor efficiency in our stores and improve the experience of both our customers and team members.

While we expect centralized decisioning to negatively impact recurring revenue written into the portfolio due to lower approval rates.

Longer term, we expect total lease revenues and margins.

Increase due to improved customer payment activity longer customer retention and lower write offs.

At the end of the second quarter inventory in our stores and fulfillment centers were lower compared the prior year quarter due to inventory management actions. We took in response to kind of in 19.

As well as recent supply chain disruptions across our major product categories.

While we expect supply chain issues to persist, we're working closely with our current vendors and new suppliers and are seeing signs that conditions should improve over the next six to nine months.

This period of supply chain disruption highlights what a competitive advantage our woodhaven manufacturing division provides as it allows us to have better control over our upholstered furniture and bedding supply.

S. C N a expenses were down 26 million or 10.7% in second quarter compared to the prior year period.

Approximately one third of the reduction of the deferral of marketing spending while the remainder of the permanent reduction.

Mostly due to store closures over the past 15 months.

In the back half of 2020, we expect an increase in SGN, a expense, resulting from increased marketing and labor costs.

Right off in the second quarter were 3.7% of lease revenues, a 190 basis point improvement driven by strong customer payment activity and more conservative lease decisioning, partially offset by an increasing mix of ecommerce.

Importantly, ecommerce write offs improved 310 basis points year over year.

Adjusted EBITDA increased 17.4 million or 44% compare to the urea quarter, resulting primarily from strong customer payment activity and lower SGN, a expenses and write offs.

Partially offset by a smaller lease portfolio balance to began the quarter.

Adjusted EBITDA margin was 13.2% versus 8.9% in the prior year quarter.

To summarize I'm thankful to all the aarons business team members for their extraordinary effort to serve our customers our company and our communities during this challenging time.

With many parts of the country experiencing a significant rise a new cobot 19 cases, we remain diligent and our safety procedures for our customers and team members.

Continue to make adjustments to our operations as necessary.

Looking forward I'm excited about continuing the transformation of the aarons business as a Standalone company.

We have a large market opportunity a compelling customer value proposition and the right strategy and team in place to drive future earnings growth and strong free cash flow.

I'd now like to turn the call over to Steve to discuss the second quarter financial results.

Thanks Douglas.

First let me begin by joining John and saying, Thank you to Ryan for his leadership and friendship over the last six years.

Having just had my 25th anniversary with Aaron's I cannot think of more exciting way to start the next chapter with this great company.

I'm humbled and honored to be taking over for write a CEO progress.

The results over the years speak for themselves.

He's assembled a first class management team and position the business for continued growth into the future.

Have you been involved with the progressive team from even before the acquisition I'm familiar with inner workings.

Many of our retail partner teams and I'm committed to continuing his legacy technology innovation and dedication to its mission of providing simple and affordable purchase options for credit challenge consumers.

Importantly, I leave the corporate office in good hands.

Kelly wall, the company's current senior Vice President Finance and Treasurer has been appointed interim Chief Financial Officer.

Joining air into 2017, Kelly brought extensive corporate finance experience and quickly became an invaluable part of the executive team.

He has strengthened our treasury function and our bank group.

Updated enhance our credit facilities.

As interim CFO, who will be a great asset for John and the entire team as we work to execute on the strategic separation.

On a consolidated basis revenues for the second quarter of 2020 were 1 billion, an increase of 6.4% over the same period a year ago.

Adjusted EBITDA for the company was 129.8 billion for the second quarter of this year compared to 107.4 billion for the same period last year.

Increase of 22.4 million for 20.9%.

Adjusted EBITDA was 12.6% of revenue in the second quarter of 20 tiny compared to 11.1% in the same period a year ago.

Given the continuing uncertainty is with respect to future government stimulus and related economic conditions. We have made no reductions to the incremental cobot related reserves established in the first quarter.

We will continue to evaluate the stance each period just as necessary.

Our customer payment activity has remained strong throughout the quarter. However, we have maintained a conservative stance with respect to our reserve position as the depth and duration of their current economic slowdown caused by the cobot 90 brands.

And the degree to which government stimulus will continue to support our customers one of the current cares Act lapses is unknown.

Again, well the portfolios to perform well and are in good shape today.

We believe these reserves represent our best estimate on the potential impact we may experience to future periods.

Diluted EPS on a non-GAAP basis for the quarter increased 27.4% to $1.18 versus 93 cents in the prior year quarter, primarily due to the continuing strength of customer payment activity lower operating expenses and reduced levels of inventory write offs.

Operating expenses decreased 39.7 million from the second quarter last year.

Of which roughly $15 million is due to year over year store closures and the parents business.

About 10 million doesn't change is due to reductions and write offs across the businesses.

10 million is due to reduction Aaron's business marketing spending of which about 8 million was deferred to the second half of 2020.

The remainder is primarily temporary kobin related reductions.

Cash generated from operating activities was 360.8 million for the six months ended June Thirtyth 20 Twond.

As of June Thirtyth company had a cash balance of 313 million and gross debt of 286 million.

During the quarter, we did not repurchase any shares of the company's common stock.

Where we have maintained our quarterly cash dividend.

In March of this year as a result of the uncertainty caused by the Cobot 19 pandemic, we would through our full year 2020 out.

In early June we provided a big quarter update.

Because there continues to be a tremendous amount of uncertainty in the market, we would like to continue to be helpful to our shareholders and analysts.

Therefore, we are providing a consolidated revenue and non-GAAP diluted EPS outlook for the third quarter.

For the quarter, we expect consolidated revenues between 950 975 million.

Non-GAAP diluted earnings per share between 80 cents, a 90 cents.

This outlook assumes no significant deterioration in the current retail environment.

Some level of continuing government stimulus a gradual improvement in global supply chain conditions.

As a reminder, due to the portfolio nature of the business. The company expects that reported revenues and non-GAAP earnings in the third and fourth quarters will be highly correlated to the volume of lease originations in the preceding two quarters.

With that I'll now turn the call over the operator, who will assist question and answer period.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

This time of a pause momentarily to assemble our roster.

[noise] and our first question comes from Kyle Joseph of Jefferies. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions and I'd like to pass on my congratulations to.

You, everyone Kelly Ryan a everything right, we'll Miss you Jamul net but that doesn't that everyone not all the moving parts.

And on the announced spend very.

Very exciting first question for for Ryan a appreciate that color you provided on invoice volume trends during the quarter, even in a sense as to how that's trended in July and then follow up that would be gives a sense for how 90 days buyout activity trying to a month by month in the second quarter.

I'm happy to thank you Tom I appreciate it.

So we haven't closed quite closed July yet and.

Providing monthly insight for kids for Q3, right now, but I will say that we're expecting to.

To be able to report a continuation of that trend of improving invoice volume.

So we expect to see year over year growth in Q3 up from.

A slight decline we saw in Q2, which is I break more excited about that.

On the 90 day buyout trends.

We are we have seen higher levels higher year over year levels of 90 day buyouts, it's starting to take for a bad as you might expect as the effects of stimulus kind of play out a little better than what we see there going forward in Q3 will be wholly dependent on what happens with any future government stimulus we just.

Don't have enough visibility I'm, not yet to sort of.

Talk about how that'll play out in Q3, but we definitely did see higher higher year over year levels in Q2 it.

The P to P deference isn't that pronounced it sort of mid single digits. If you look at sort of the peak.

Heat rate of 90 day buyouts last year. It comes for a given monthly fool compared to this year. It's just a continuation of that we saw this year is supported by the stimulus that's driving the variance you saw that we reported in gross margin.

Appreciate that thanks, Ryan and then I'll hit the Douglas.

Nice job turnaround business this quarter, but you know as as we think about a third quarter in the fourth quarter.

It sounds like a lot of that the payments were very high in the quarter. So you know based on where the pre where the portfolio ended the quarter can you give us any sort of sense for directionally, how the comp how do you anticipate the comp trending going forward.

Yeah sure Cal Yeah. So we saw improvement all through the quarter you know despite the low and revenue written in April 35%, we saw rebound in May and June.

And as we enter the third quarter, we're seeing a increasing strength I'd say in the portfolio really due to higher customer retention and lower write offs.

We said that continuing going into Q3 I mean in early July our collections are strong portfolio continues to improve we're seeing a lot less.

Attrition I would say out of our portfolio and based on these trends were and continued trends on retail sales I'd say, we're looking at a positive comps in Q3 as we move forward. So we're very optimistic away about the way the orange business is trending.

Got it and then just one from me on the spin Yeah, I'm trying to get a sense or how much the business is still relied on each other.

The progressive how much it relied on aarons in terms of.

The last weekend and how much progressive relied on the consolidated balance sheet or sorry, how much progressive less relied on the consolidated balance sheet, but you just kind of walk us through what's changed since 2014 in terms of how much they relied on each other.

Yeah, Hey, Kyle it's John Good question.

I'll tell you back to 2014, we kind of consciously made a decision to run the businesses separately Progressive is obviously on a.

Great.

Injector read that point, we wanted to continue that felt like keeping the business as a separate as possible made a lot of sense from that perspective is also made a lot of sense from kind of firewall and.

Information between the companies. So we felt like those are importance, we really haven't run the businesses.

Largely independently since the acquisition, we've got separate management teams separate headquarters.

We've allocated the overhead of the businesses, we believe very efficiently to each of their KNL.

We have shared knowhow and technology and learnings back and forth that we really executed those separately and independently between the two businesses.

And there's certainly been some good example on real wins for both businesses, but you know.

For example, like reverse logistics and progressive that was no held it was ported over from parents, but its executed largely.

I almost exclusively by progressive employees today so.

There's really very few dis synergies I'm splitting the business is really due to the way we've managed the businesses since the acquisition.

Our expectation is they'll be limited and temporary if at all short term shared services between the businesses because of that as well so there.

There's some back off the sharing that's going on obviously around being a public company and boards and Ah.

Things like that but.

But largely separately, though the whole kind of.

Duration of the acquisition, so that certainly lends itself to being separated.

Going forward.

All right. Thanks for answering all my questions I'll hop back in the keys that congrats on a good quarter and they static exciting announcement.

Thank you.

Our next question comes from Brad Thomas of Keybanc Capital markets. Please go ahead.

Thanks, Good morning, and Tom Let me add my congratulations as well to the team on the.

Many roles and opportunities ahead here exciting time [noise].

My it's a follow up on some of the previous questions.

Yes.

<unk>.

I'd be curious is there any degree of non compete it you would set up you know for the Aarons business like if I step back and think about the trend in the industry, obviously aarons acquiring progressive your main competitor rent a center doing acquisitions to try to grow its direct business.

Oh, I guess is there anything to keep the Standalone aarons business in the future from trying to build out its Alan.

Direct competitor to progressive as we think about the next few years.

Thanks to the question Brad.

John I would say this separation is not a bell.

Drastic change in strategy for either company and there are certainly be no limitations on their strategies going forward nor have there been historically.

Probably not a privilege for me to speculate where the market goes to market moves and that's a big market Theres a lot of opportunity in a lot of different pockets in the market. So.

Probably wont wont can't speculate on that but.

Both businesses.

Have a good competitive position they have different.

Financial profiles capital profiles.

But but have great opportunities and great strategies going forward, and we think separate though a lot more value, but yes, there will be never restrictions as there haven't been in the past it won't be need going forward on either business.

Okay. That's helpful. Thank you John.

And if I could move over to fundamentals on the progressive side.

Ryan can you talk a little bit about the health of the retail partners that you have.

Obviously been there they've been some bankruptcies in the furniture sector companies like ours man.

How is your retail portfolio looking today, and then can you give us a bit more insights into how some of your newer large partners had been performing blade.

I should think Brad I believe generally they're doing very well, especially will all things considered you know there was a lot of a lot of movement within the portfolio over this period of time as you can imagine we saw thousands of doors.

Close in response to Kevin sort of late Q1 early Q2, and then thousands of door subsequently reopened.

So it's been a bit of a tumultuous time, but that's a very much admired the resiliency of our partners and how they work through that and we're able to adapt.

We talk on last quarter's call about the curbside notion E commerce initiatives. They kicked off during tell that which we get our best to support and I think that's been a silver lining and all of this is how it's.

How itself solidify those relationships and finding new ways to grow the partnerships which is.

Which is great I think we certainly saw some closures bowl among our small and large partners, but I would say absent.

The temporary closures due to talk a bit in spite of any permanent closures, we would have seen year over year gross and active locations for the second course, I think we would have reported growth instead of that.

2.9% decline, who would have been we would have been talking about growth, which I think speaks volumes about the resiliency of our partners and our partnerships which is good.

And then the opportunity ahead of US I think for each of those remains very bright we have.

You know a lot of those largest newest relationships are still relatively new with significant opportunity to grow hopeful in store and online we talked and so that I've talked about our on merge sort of shared E com initiatives, which represent very compelling long term growth potential for the business that we're working.

Very hard to execute on and.

It together.

And and I'm very excited about that so I think there's a lot of potential therefore in store and online as we go forward.

Hi, Thanks, Thanks, so much Ryan and best of luck here going forward.

Please one last question here for a perfect for Douglas.

You mentioned some.

She is a product availability that may last for the next six nine months I believe.

I don't think I heard this could could you help to quantify what the to what degree your inventory or product selection.

It is not quite where you want to be today.

Sure Brian as you know a white most retailers when we entered the.

Challenges with kind of the crisis and close our showrooms, we pulled back on a lot of our borders.

As we began to rebound we kinda, we got our PEO process back and running suppliers.

Generally of having a hard time meeting the demand out there in the marketplace, we really feel like we're in good shape in our stores and my comment was really around other level on a NRF sees a and our stores were able to meet the customer demand. Obviously, we have preleased coming and that helps us do that and a rough seas were down and that.

Really impacts or E com business more than anything because when you're shopping online you're looking for a specific product that's being shipped from our overseas.

As we think about going forward on a per store basis.

We're down probably the comp combined with our FCS and our store inventory about 20%, but.

But we believe that's improving every day as we're getting orders and particularly in appliances. The six to nine month timeframe as related for all of our products, we're seeing a little slower.

Supply chain on computers, and gaming, but furniture and appliances or are moving more rapidly I. Just want to also mentioned Woodhaven mentioned I'm not prepared remarks that as a real strategic asset for us. The fact that we can get bedding and furniture from our what him facilities and control the supply channel that is huge.

Management I, just want to shout out to that team because they're working really hard to get us where we need to be entering the third quarter. So.

That's very helpful. Thank you all so much congratulations to you as well.

Thank you appreciate it.

Our next question comes from Elizabeth Suzuki of Bank of America. Please go ahead.

[noise] Elizabeth your line is open.

<unk>.

[noise] sorry, guys I was on me [laughter], sorry, I, what do you think it's been that the net impact at the cares Act on both sides of the business, a and and have you noticed more recent changes if those benefits start to wane in can you quantify any of those changes.

I mean this is John I'll I'll.

Yeah, quantifying is going to be tough I'll be honest, because there's clearly been impact on [noise].

Businesses in primarily manifests itself in strong stronger customer payments than we might have seen this time a normal year.

But it's hard because there's a lot of different variables that are mixed on the progressive side, you can see the impact in higher 90 days, which flows through to gross margin, which the team did an awesome job of offsetting.

True cost control and lower write offs.

But but it did net down to a lower margin year over year EBITDA level for progressive on the air inside so we've seen a lot of benefit there to be portfolios performed differently that it's probably Lincoln doubt the duration of the portfolio there, which has resulted in as Douglas said or where the portfolio.

Staying larger than we might have normally seen because of lower attrition and.

You know its resulted in strong revenue in the quarter and positive comps and Doug will set the expectation for positive comp.

Next quarter. So it's a it's definitely that impact that you when you.

Kind of blend that in a lot of the initiatives that we've taken we tightened dawn decisioning across the whole enterprise.

In late March we tightened on expenses.

And you know, it's it's really difficult to know exactly quantify we believe me we try to we think about it.

And our expectation is there will be some sort of stimulus going forward as we talked about in our guidance but.

Not completely clear on how much of it we can attribute to.

The cares that the other side of it obviously as we closed stores during April.

They are its business progressive.

Had a lot of retail partners closing stores, there's still a lot of moving parts to try to quantify that but that's probably the best we can do in terms of answer that question, but it's probably net net been.

The tailwind but.

There are lot of moving parts.

Gotcha and at what portion of your core or do you think was impacted by stores being close I mean, then is there anyway to quantify that and think about it's me go forward into the next quarter are all are really all of your stores open at this point and all of your partner stores that then.

Yeah, I think is clearly a major issue in April as you.

Heard from Bose.

Ryan and Douglas that started to improve through you know really started improving in may and putting it back half a million ended June.

But.

You know, it's I wouldn't say its normal still I mean, there are definitely pockets around the country for different reasons were stores are opening and closing.

For different reasons that we would not normally have seen in them and in a normal year. So I would say, it's still having an impact.

And it's a little unpredictable just given how the virus is kind of.

Affecting different areas differently and so we're just kind of happened to be agile and the team has done an amazing job it progressive with everyone basically working from home and run the whole operation remotely and supporting our retail partners in the Aarons business. You know the team has done an incredible job with just reacting to local.

Ordinances and spikes in the virus and we're still dealing with it so I don't want to come across that Weve. I think April was also a low point definitely not was dealer point, but.

We're still dealing with it sounds, but we would definitely come back quite a bit both sides, but.

I would do I wouldn't say, we're out of the woods by any stretch.

Great. Thank you.

Our next question comes from Anthony Chukumba of loop capital markets. Please go ahead.

Oh good morning, Thanks for taking my question. So I get my first question you don't I know, it's tough to have a crystal ball, but commencing with the guidance third quarter.

That that includes some level of continuing government stimulus and I'm. Just wondering if you could just give us a little more color in terms what your expectations are made.

All right now universe talk about that it's going to be another round of corporate color checks and maybe some level.

Yeah, its federal unemployment rate, maybe it's 200 Bucks, maybe 70% of income I guess I was trying to get a better sense for what you're you're specifically fit together.

Yeah, I mean, this is John and I'll, let Steve.

Phil in here, but what I would say is.

Our expectation is there'll be some level, we don't know what that will be and we probably baked in some conservatism in terms of what we think it might be but.

The expectations or be some level continued unemployment benefit.

And then probably some stimulus I mean, obviously, it's moving the good news is changing daily on this and there's a moving target right now, but we.

We do have an expectation there would be some but maybe a lower level kind of in what we were forecasting outlets. Steve you have anything to add to that no I mean, I think that's right there.

It seems like both proposals out some level of onetime checks as well as.

Some enhanced by employee benefit and there the dollar amounts or are not.

The same yet, but there will be negotiations and so we've been a you know we expect.

Something we'll get pass and we've we've baked that into the guidance but.

Probably not the same level as John said.

Got it right and then just one last question. You're obviously you don't you don't have a kind of different your balance sheet, but I'm. Just wondering how do you think about the debt that you do have.

Sort of forcing that off to Eric persons progressive once the businesses are separated.

Yeah. It's a good question Anthony it's some of the work that will take place that for the next few months as we said in.

Our release this isn't a process that will.

Sake.

Much of the rest of the year to complete and kind of setting up the balance sheets is.

Part of that work that has to be done we're fortunate to be to position as you said a light at the ended the quarter being a net cash position. So we have more more cash than debt. So it gives us a lot of flexibility and given that were net cash position. We expect it both businesses will be kind of set their independent directions with.

Really conservatively capitalized balance sheets.

Exactly.

Makeup of that at this point or how exactly a portion of the debt has not been decided will work on that and update you guys as we know more.

This is Steve one last thing I would add on that jumps exactly right but.

For one of the first questions and the reason for the acquisition back in 2014 was really to give progressive.

Visible and public balance sheet to.

They are able to have good visibility.

Our retail partners that we recording of the times and project strengthen the.

Access liquidity and the ability to Oh to support those retail partners in their growth and so that's another thing that's changed over the last six years Progressive has grown so well then so nicely to the point, where it has the scale of the size now that.

We'll be able to as a standalone business no matter, what the capital structure split ends up being over the next on the separation date, though it will have a progressive wow great balance sheet.

Can you to be a asset for for us as we have as we quarter additional.

<unk> support our existing retail partners and.

Try to attract new ones.

Got it that's helpful. Thank you.

Our next question comes from Bill Chapelle of Suntrust. Please go ahead.

Thanks, Good morning, and congratulation.

Nobody.

Few quick question.

One I I realize we're early in the stage, but any kind of guesstimate on kind of cost of the split synergies a of of post split in kind of.

Hum also where I assume both companies will reside in in Georgia, but I didn't know if there was something there too.

Yeah, well, that's we've talked about earlier in the last point progressive as the headquarters and management team in Utah. So.

Progressive headquarters will be Utah, the aarons business will be headquartered in Atlanta.

In terms of yeah, we thought about the synergies earlier, we don't think those are significant.

Given that we've done.

We were run the business is very separately Bill and then.

Allocated we believe expenses pretty accurately for all these years between them. So there shouldn't be any big changes there.

In terms of onetime expenses, there will be kind of what you would expect from a advisory standpoint.

To do this going forward I don't have a number for you today, but.

Nothing abnormal relative to the sort of process in terms of of expenses that we expect to incur to get the separation completed.

Yeah. Those the obvious is that I mean that bill. This is minor, but I was just that normal kind of public company board or sports cost.

For progressive and yeah, we do some allocations as it relates to a you know the audit but yes.

Because of the audit so there will be and listing fees on exchange fees and things of that nature, but.

Nothing material is jobs.

Okay, So mainly just public company costs.

So some public company costs, yes.

Got it and then and then just specific poor or progressive.

Can you talk a bit about just how the I know with the best buy you were going online at the started the year, obviously best buy talked about how.

The enormous amount of their business is going on lines I just didn't know if you know the your your share where you're the percentage the business I mean, how that works maybe some color in terms of has not just with best buy with all customers that they've got more online have you kind of held the the percentage share a have a business that you would get normally.

Line or you know as there are many changes or surprises.

Hi, Thanks, Bill they the measurement exercise on that's a bit tricky given the disruption that we've experienced but store closures and reopening so that bounces shares and just sort of apples to apples comparison, we feel good about where we're at in stores and our volume relative to the overall volume were seen in the stores.

Obviously anything at all that we get online is incremental to that.

Does initiatives are on track while teams are working extremely hard.

Just sort of bring us to fruition and.

Scraped, it's great to have the distrust sporting good partners in making that happen. So we're we're I guess I said before so far just repeat myself very excited about potential there and.

You know I expect that should be a a near term benefit.

Okay. So too early to tell or I guess, it too confusing to tell is probably the best way to [laughter] no.

Absolutely going to be or mental whats, yet we feel good about what's happening in stores and we're on track to robust things out so we feel good.

Okay, and then Douglas one one for you just any update I I think there was a fair amount of advertising around the pre approval process now that you have centralized decisioning any update of how that win again I know it's a it.

Choppy environment to to see that but just any thoughts there would be great.

Yeah, Bill I mean, I couldn't be more proud of the team and the rollout of our centralized decisioning. We've got a site apply that aarons dot com.

You can go get pre approved either on your phone or in stores and obviously, we're advertising that I'm. We're now seeing now almost all of our customers either go through E com more in our stores now going through that channel to get approved and to get their leasing power and it's just given us the ability to control risk and drive margin and.

Probably most importantly, if you ask people in our stores, it's just creating a really great team member experience and customer experience.

It's just so much easier takes away rather models and the outcomes have been really strong so.

It's all working and we're really happy with it and I think that's what's giving us a lot of confidence in the sort of higher customer retention going forward and stronger profitability. So a really really successful program and we look forward to send the result, as we move forward.

Got it thanks, so much.

Our next question comes from Bobby Griffin of Raymond James. Please go ahead.

MINDBODY. Thank you for taking my questions I'll, everybody is a stand say oh, congrats on good quarter in a challenging environment.

Doug was I wanted to go back to kind of from your comments about the core business first but if you guys have done a lot of work on the store lot rationalization efforts and there's still some more to go if you're looking to market. It you've already done are completed the large part of that rationalization. What do you kind of seeing from performance metrics of those collective stores to kind of.

Maybe highlight what the opportunity is going to on a long term basis.

Yeah. That's a great question you know we've been closing emerging stores for a while I mean, the beauty of the business, we have as the portfolio based business.

But effectively take these two books of revenue and put them together within a close proximity and retain you know.

Even if you retain up to half of the <unk> the customers. It drives a significant increase in profitability from the cost take out a we've been investing heavily in market strategy in order to understand the further opportunity there I'm right now we're at 1100 stores, we think we have considerable.

Market opportunity to do the same and I would say would be a combination of.

Close merge activities to getting in slightly bigger boxes, and better retail locations and enjoying the economics that we've seen historically from doing that but with greater attention just from being a better spot in the market and really servicing the market through larger boxes and more E com and we've seen that being.

Successful recipe.

Also I'm looking at repositioning some of our stores and our more recent red repositioning work and investing in place in the places that we think a real winners as also yielded benefit as we put our gen. X. model in place. So I'd say, we're gaining more and more confidence in our real estate strategy and that's going to be an important pillar of how we drive.

Strong cash flow in the long term add to earnings grow so out but it very.

Important pillars for a long term strategy.

Okay I appreciate that and then I guess also on your comments about written revenue into the portfolio kind of down low single digits in Maine, Joanne I assume that does include the impact of the closed stores that you're doing throughout the quarter and if so is there way strip out the close store impact and maybe get a sense of what written revenue.

Written revenue into before it was doing on a comp store basis like the same store count year over year.

Yeah. So the numbers I gave you were on a comparable store basis. So it doesn't include the impact to that and so yeah. Importantly, we we've seen positive trends in that I you know as we look forward. The revenue written number will will decrease slightly I just want to be clear on that as we.

And I said this is my statements, but as we use our centralized decisioning tool in the portfolio and it becomes a bigger part of the portfolio we will be.

Not a proving as many customers, which will impact negatively recurring revenue written but positively impact our ongoing revenue and margin.

And so that's important as you think about that in addition, as you know last year in the third quarter. We had a large sales initiative, which drove recurring revenue written up by about 13%, but we had negative same store revenue due to lack of Collectability, we should see the opposite this year in the third quarter with negative.

Revenue written due to centralize collections in Comping over last year, but positive same store revenue.

Okay. That's very helpful. And then lastly from me Ryan I understand the early buyout ticked up, especially with the stimulus and stuff as well as the mix of business is there any way to separate out the 450 basis points, even if it's rough numbers declining gross margin. How much you think that was just kind of core mix of business change.

Converse early buyouts being at a much higher rate because the stimulus.

Ah, yes, yeah, I can give you a decent sense that it's a good question, we had talked I think in the last two quarters.

Quarters calls about the expected or impact on gross margin of those recent.

National launch is and the resulting shift in mix as well as growth driving under portfolio area in the year, We said that we expected it would have.

An effect on gross margins and about a third of that I would say roughly is attributable to what the trend we expected and the rest are the rest I would say is primarily driven by government stimulus.

That's very helpful. Congrats to the team on all the all the moving parts of was for the Watson unfold and best of luck in the third quarter.

Thank you.

Q.

Our next question comes from Alex Moronuki out of there I'm Burke. Please go ahead.

Good morning, guys I hope, you're all doing while expanding upon a 90 day buyout trends you mentioned earlier can you provide any clarity into higher considering the later than usual tax refunds that some people were saved this year.

Hi in the context of expecting a prolonged effect attributable to tax refunds. In addition to government stimulus yeah, I would just be the stimulus increasing on a 90 day biopsy expecting something similar given that July 15th talks that sure.

We expect to continue to see higher levels of 90 day Biothrax I expect that will have an effect, although I believe it will be somewhat muted in the context of ongoing government stimulus. So.

We expect the trend of higher higher year over year 90 day past continue that will be a compliance I think the larger combined will continue to be government stimulus given that we expect some some some support to be past year, a in the future over Q3.

Got it Okay, and secondly, I know that you were anticipating the online adoption at progressive for a few of the larger retail partners. Starting in July have there been any changes in timing there and are you expecting to see any immediate benefits from it.

Oh, we do expect to see benefit in Q3 from those initiatives.

Yeah.

Everybody's been working really hard every once in a lot focus on lately, but the teams have been exceptionally focused on delivering on those initiatives.

Super proud of the progress of bookings.

Our internal teams, while his or her teams have made on those initiatives and I expect them to bear fruit in Q3 indeed.

Got it alright, thanks, so much.

Okay.

Our next question comes from Vincent kept panic of Stephens. Please go ahead.

Thanks good.

And first question for Ryan So thanks for all your hard work and started to see you go.

Actually the number one investor question I'm in getting this morning to the extent you can answer it so I.

I guess why you're leaving at this time given the gross an opportunity we've been seeing and no. So investor feedback has been surprised about your meeting any any comments can make there.

I've said sanctions and also it was it.

Ultimately a personal decision, but a really top line just so proud of the team here progressive.

And I really do believe the business as a very bright future.

There's never a perfect time for these things and.

As a as excited I am not the future business in concert I am and that team then they're going to work with Steve.

So that creates great success of the business. It just felt like the right on the separation felt like the rig time to enter the range to do a new leader to continue the mission.

I'll enjoy that no watching their success, Nick and I of course.

Could you just to be available the company to Steve's as an advisor.

As I sort of watch that success play out.

Yeah. This is John listen the thing I'd add Brian's, obviously, an exceptional talent, we've been lucky to have him. He's done amazing job one of the things that I think because I think you've done bass is built and.

Really grow and I'm really outstanding team.

You know what we've got a lot of talent mean, Blake Wakefield as president of the business he's been here since 2013.

He is completely conversant the business across all the different disciplines knows that retail partners extreme extremely well, there's the strategy seems extremely well.

And there's just a lot of depth and breadth from a team perspective, and then there Ryan said that earlier and it's really really true so.

He is definitely position the business to continue to perpetuate its trajectory and.

That's why we're.

Couldn't be more appreciative of that that kind of development that infrastructure development that Ryan has put in place that allow the business to continue on and Steve Obviously I've worked with very closely for.

Long time, now and Steve just knows the business extremely well have outstanding judgment.

An executive level and a great view on the strategy for the business the great understanding of it and it's not a distressed spend the same for long time progressive.

Really before even my time and.

Brian It's just enhanced and Steve will enhance the further with Blake health and the rest of the team so.

As much as Ryan has a great talent as much as he's out front on these calls.

He would be the first to tell you that the success of progressive is a function of outstanding team that has grown and frankly needs opportunity and there's a great opportunity for a lot of folks because of this change so.

I'm just want to make those points that are important to understand as a as an investor.

[noise] appreciate that and John.

Sorry about being able to hear you on a quarterly basis to but but I'm glad you're staying on for 'em for Stephen Douglas has yet to see the Ceos of businesses, maybe you could speak too.

Yes, what your focus is there going to be going forward as separate companies.

And in each strategy any particular focused as you see going forward and that's it from thank you.

Yeah. This is Douglas Vincent So I mean, you don't aarons business not much change as a matter strategy is consistent with what we've been doing we have a large resilient customer base and we feel like you'll get a little winded our back from a macro standpoint. So we're really excited about that we really believe in our compelling.

Value proposition for our customer I was really starts with superior pricing relative to our competition.

We now can approve a more customers and just about anyone else in the marketplace and we've got this embedded service advantage with our stores in our supply chain and our versus supply chain, which is.

We believe really compelling out between layer on top of that digital enhancements like.

Centralize decisioning and our E comm platform and all the other advancements that we're doing to sort of simplify and improve the customer experience a it's really compelling and so you know we're pursuing a longer term real estate strategy, which we think adds to that and provides positive cash flow and earnings growth.

The overall makes of the business. So when you put all those things together and then look out at the second half a 2020 and.

Our outlook going forward, we couldn't be more optimistic about the business and the benefit for shareholders.

Yeah, Vincent as Steve I mean, I was just that basically what John said that you know I'm very excited to be joining this really strong team that is executing at a very high level and the strategy is sound. We've got this very large and largely unserved massive market where were the whereas we're the leader.

And we will continue to.

The invested technology and innovate our product and for the betterment of our customers, both current and future and retail partners and.

And continue to continue to spread and increase the by at least at retail both online and in store and so we've got great business model with Thats cash generative at at high growth rates.

And and short duration portfolio with great visibility for us to be able to be nimble and and react to things that we're seeing in the marketplace. So.

The the strategy will evolve over time, just like it has over the last six years, but it is working and we will will be doubling down on it.

Thanks, so much at all.

This concludes our question and answer session I would like to turn the conference back over to John Robinson for any closing remarks.

Thank you for participating on our call today.

I was just like to reiterate how much I appreciate our team members hard work over the past few months.

It's definitely a challenging time and delivering such strong results in Q2 is exceptional.

Also likely again think Ryan Woodley for all his contributions to progressive and wish him the best of luck in the future.

And lastly, I'd like to reiterate how excited I think it announcement today.

In the opportunities ahead for progressive and Aaron's.

Thank you again for your participation on the call and we look forward to updating you on our progress.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.