Q3 2020 Aaron's Inc Earnings Call
Good morning, My name is Brandon and that'll be your conference coordinator.
At this time I would like to welcome everyone to the Errands Holdings Company third quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there'll be a question and answer session problem.
I will now turn the conference over to Mister Michael Dickerson, Vice President of corporate Communications and Investor Relations of Aaron's Holdings, you May begin your conference.
Thank you and good morning, everyone welcomed to the Arabs holding third quarter of 2020 earnings conference call.
Joining me this morning, or John Robinson, Erez, Holden's, President and Chief Executive Officer, Steve Michaels, Chief Executive Officer of Progressive leasing Douglas Lindsey Chief Executive Officer of the Arabs business and Kelly Wall Errands Holdings interim Chief Financial Officer.
Many of you have already seen a copy of our earnings release issued this morning for those of you that or not it is available on the Investor Relations section of our website at Investor Dot Darris Dot com.
During this call certain statements, we make will be forward looking.
I want to call your attention to a safe harbor provision for forward looking statements that can be found at the end of our earnings release.
The safe Harbor provision identifies risks that may cause actual results to differ materially from the contents of are forward looking statements.
Also please see our form 10-K for the year ending December 31, 2019 at other periodic filings with the SEC for a description of the risks related to our business that may cause the actual results to different materially from a forward looking statements list.
Listeners are cautioned not the place undue emphasis on forward looking statements and we undertake no obligation to update any such statements.
On today's call, we will be referring to a certain non-GAAP financial measures, including EBITDA and adjusted EBITDA non-GAAP net earnings and non-GAAP EPS whichever 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.
Polluted with our earnings release.
The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the companies ongoing operational performance with that I'll turn the call over to John Roberts.
Thanks, Mike and thank you all for joining us today.
Third quarter performance was outstanding across our businesses, especially in the face of a very difficult operating environment.
Consolidated revenues of 1.052 billion was the highest third quarter revenue we've ever reported.
Adjusted EBITDA and non-GAAP earnings per share of 178.3 million and one dollar and 80 cents respectively. We're also record quarterly results.
Well, we believe that strong customer payment activity has been aided by the covid related government stimulus or.
Businesses recurring revenue models continue to demonstrate their strength in this period of economic volatility.
I've never been prouder of the teams at each of our businesses.
Our team members at progressive leasing the errands business vibe in Woodhaven, if demonstrated extraordinary commitment resilience resourcefulness and compassion throughout 2020.
Since the onset of the pandemic, we've taken significant actions to protect our team members and customers, while maintaining business continuity managing expenses and driving portfolio performance.
It is a dynamic environment and our leadership has risen to the occasion.
I would like to express my sincere gratitude to all our team members for your commitment to serving our customers during this difficult time.
Just a minute Stephen Douglas will take you through their respective businesses financial performance, but before that let me update you on the status of our spin transaction.
The team led by our interim Chief Financial Officer, Kelly Wall has made tremendous progress thus far on October 16th we completed the holding company legal structure change.
Or for 10 has been through a couple of rounds with the S. E C and we expect the document to go effective sometime over the next few weeks.
And sure we expect to complete the transaction by the end of the fourth quarter or perhaps sooner.
I expect that between the time to form 10 gives effective and went issue trading begins each business will hold a webcast with investors to discuss each of their businesses Standalone strategies.
The anticipated business separation will be the culmination if it's successful six year period highlighted by tremendous growth at progressive leasing and transformation at the Aaron's business.
Over this period consolidated revenues of ground at a high single digit compound annual growth rate with adjusted EBITDA and non-GAAP EPS growing it low double digits and high teens, respectively.
Progressive leasing is performed exceptionally well since Aaron's acquired it in 2014 growing annual revenue more than four times to approximately two and a half billion with attractive and growing profitability.
The progressive team executed this strategy of growing invoice volume with existing and new retail partners, improving the customer experience through continuous product development building.
Building, a deep bench of talent and developing the business processes and controls to stand alone as a public company.
I can't think the progressive leasing team enough, including Ryan Woodley, Blake Wakefield, Kurt Doman, Bryan Garner Marvin's dangerous been Hawksworth, Ryan Ray Tanner Barney Trevor Thatcher.
Nate row, Curtis Hilton, Michelle Parker and many more for your tremendous contributions to progressive success.
On the Arab side of the business I'm equally proud of the progress that has been made to transform the business into a digitally enabled omnichannel lease to own retailer.
The errand business team led by Douglas Lindsey and including Steve Olson, Ryan Malone, Robow Connell, Russ Falkenstein, Corey Vogel Songer, Tommy Meek Man Jewish Varghese.
And John trainer have done tremendous work overhauling strategy and many of to keep functional areas of the business all the while maintaining strong profitability.
The fact that the errands business is once again well positioned for success as a stand alone company is a direct result of their efforts their teams and many others.
We appreciate shareholders standing bias during this transformation and I believe the best is yet to come.
Following the separation I'll look forward to serving as chairman of the errand business.
Since 2014, we've continued Iran's history of rewarding our shareholders by returning nearly $400 million of capital in the form of dividends in share repurchases.
Reducing our net debt position by more than 700 million and.
And growing our market capitalization by approximately 2 billion.
We believe separating these businesses at this time is another example of actions taken by the errands Board and management to maximize value for customers team members and shareholders.
As I mentioned earlier, the management teams from progressive and the errands business are preparing to share their strategies with investors prior to the completion of the spin.
We believe progressive has the strategy management team and scale to continue capturing the large unserved virtual we used to own market with it's profitable and capital light business model.
Aaron's business, having been significantly transformed over the past five years is well positioned to continue consolidating and repositioning it's store footprint, which coupled with the errands Dot Com E. Commerce platform is expected to provide a foundation for future earnings growth and strong free cash flow.
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 will now turn the call over to Steve Michaels to provide more detail on progressive third quarter performance.
Thanks job the strengths of progressive recurring revenue model and variable cost structure, along with strong portfolio performance drove outstanding results in the third quarter.
We reported record revenues for the corner of just over $600 million up 13.7%.
And gross margin improved 80 basis points as elevated levels of 90 day by a volume we're more than offset by a strong payment performance in the period, which we believe is partially a result of government stimulus.
Adjusted EBITDA of 115.2 million represents an increase of 83.4% from the prior year and a margin improvement of 730 basis points.
Invoice volume for the third quarter grew three 4% from the prior year.
Sequentially higher than a slight decline we experienced in the second quarter.
While invoice volume did rebound from the second quarter. The retail market continues to face a challenging environment, primarily due to the ongoing supply chain shortages in furniture electronics and appliances.
We believe is macroeconomic conditions in the global supply chain improve over the next few quarters inventory levels at our retail partners will normalize.
In addition, many of our retail partners are focusing on their E commerce capabilities and are adding progressive leasing is offering as part of their E commerce platforms.
We expect to see a material lift in our online shell over the next six to 12 months from these partnerships.
Right off which have historically range between 6% to 8% on an annual basis, where 2.1% in the quarter due to fewer delinquencies and strong portfolio performance.
Over time, we expect macroeconomic conditions to normalize an invoice grow to accelerate resulting in write offs returning to historical ranges.
Currently customer payment activity and key portfolio metrics are continuing to perform very well into the fourth quarter. However, we have maintained our covid specific reserves recorded in the first quarter of 2020 due to the ongoing economic uncertainty associated with the pandemic and believe our reserves are accurate.
SG&A expenses were 11.5% of revenues in the quarter compared to 12.1% in the prior year period.
Until we have better visibility into the broader economic outlook, we will continue to manage costs and reduce discretionary spending while preserving our ability to continue to execute at high levels across all areas of the business.
Adjusted EBITDA for the corner was a record $115 2 million.
And 83.4% increase year over year, and a 19% margin well above are normal expected annual range of 11% to 13%.
The margin performance was primarily driven by improved portfolio performance and managed costs.
One of the great strengths of progressive over the years has been as talented and tenure senior leadership team one.
One rule that we did need to fill as a result of the expected separation transaction was chief financial officer.
I'm pleased to announce that Bryan Garner Progressive current senior Vice President of Finance and accounting will be appointed Chief financial officer of Progressive leasing in conjunction with the spin.
Brian is held financial leadership positions at Progressive since 2012 and has led the finance organization since 2016.
His previous experience includes public accounting and Ernst and young as well as senior leadership position positions at technology companies.
Over the years Brian's knowledge of the business and his team's track record of providing financial inside and a strong internal control environment has been instrumental in contributing to progressive profitable growth.
I am pleased to have his experience and leadership to help guide this organization as a standalone public company.
Overall I am extremely proud of how the team is navigating a very challenging environment and.
In the quarters results reflect the high degree of execution.
I remain optimistic about the opportunity ahead and believe our performance during this difficult economic period speaks to the resiliency of the progressive business model.
Finally, and I speak for everyone on the call. Today. This is likely last time. This group will be together as one company speaking to you.
We would like to express our gratitude the John Robinson.
We appreciate his vision is leadership and most importantly his friendship.
Jon's commitment to his team to our customers and the communities. We serve is unmatched and speaks volume about his character.
Speaking personally I have learned so much and benefited in measurably from Johns guidance and friendship over the last six years and the errand business will be fortunate to have John serve as chairman.
Now I will turn the call over to Douglas.
Thanks, Steve I'd like.
Echo Steve's comments and express my thanks to John for his leadership and friendship over the years and we look forward to continuing to work closely with him as chairman of errands.
Moving on to the performance of our business I could not be more proud of our team's performance this year.
<unk> business is operating at a very high level as was evidenced by our third quarter results.
Third quarter same store revenue growth and collections performance. So the best the team is delivered in my tenure.
We believe the higher customer payment activity pure returns and lower write offs experienced in the quarter.
Partially as a result of government Samuels.
Additionally, our business has remained nimble in response to the COVID-19 pandemic and investments we've made an decisioning E. Commerce in store operations are yielding higher productivity and improved portfolio health as compared to a year ago period.
So the third quarter ended September 30th 2020 revenues and the errand business for 441 million an increase of three 4% in third quarter of 2019.
Despite having 77 fewer stores in the system.
Same store revenues rose seven 3% of the third quarter, primarily due to stronger customer payment activity in higher retail sales.
The third quarter represents the fifth out of the last seven quarters with positive cops and the highest level we've experienced since 2009.
Recurring revenue written into the portfolio declined 14% in the quarter. This performance was in line with our expectations and a result of more conservative lease Decisioning continued supply chain disruption in a difficult comparison to last year, when we lost our field sales training program.
As you May recall in April of this year, we rolled out centralizes lease Decisioning and all U S company owned stores.
We would expect this rollout to negatively impact recurring revenue written through the first half of 2021 due to lower approval rates.
However over time, we expect revenues and margins to increase as a result of improved customer payment activity.
Longer customer retention and lower write offs.
E Commerce revenues grew 44% in the corner and a representative 12.5% of total lease revenue versus nine 4% last year.
Traffic to our errands Dot Com site continues to increase your every year as our customers are increasingly going online in search of affordable products for their homes.
Revenue written into the E commerce portfolio declined 19.4%, primarily due to covid related inventory shortages and more conservative decisioning.
At the end of the third quarter inventory in our stores and fulfillment centers was approximately 20% lower than the prior year quarter to the inventory management actions. We took in the second quarter of 2020 in response to COVID-19, as well as recent supply chain disruptions across our major product categories. We.
Saint continued improvements in the supply chain in the last 30 days and expect conditions to improve over the next few quarters.
Adjusted EBITDA for the third quarter of 2020 was 65 million an increase of 153% over the third quarter of 2019 and March the highest quarter in five years.
And just did EBITDA margin was 14.8% as compared to 6% last year as strong customer payments lower write offs and continued cost controls drove margin improvements.
SG&A expenses before the impact of spinner wedding cause we're down 7.2 million or three 1% in the third quarter compared to the prior year period.
Permanent reductions, mostly due to store closures over the past 15 months or partially offset by increased marketing expenses differed from the second quarter.
Right also in the third quarter of 2.4% down 500 basis points from the prior year third quarter and the lowest we've experienced in several years.
Right off improvements were driven by strong customer and payment activity and more conservative least decisioning in our stores animal <unk> Dot com.
I'm pleased by these results and I'm encouraged about the future and our next chapter as a Standalone public company.
None of this would have been possible without the extraordinary dedication and hard work of the entire Aaron's organization from our leadership team to our dedicated team members in our stores are store support centers in Woodhaven.
As we look forward, we believe we have a large market opportunity a compelling customer value proposition and the right strategy and team in place to drive future earnings roads, and strong free cash flow I cannot be more excited about our competitive positioning and continued transformation.
Finally, I'd like to announce that Kelly wall currently our interim Chief Financial Officer Errands Holdings has agreed to join my team as Chief Financial Officer of the errand business immediately following the span.
Over the last several years and his roles SVP of finance and corporate Treasurer, Kelly has led to companies corporate finance Investor Relations Treasury and M&A activities and more recently has helped lead the organization through this spend transaction.
Kelly and I have worked closely for the last four years and I'm thrilled to have his experience and leadership to help guide this organization as a standalone public company.
I will now turn the call over to Kelly to discuss our consolidated third quarter financial results.
Thanks, Douglas on a consolidated basis revenues for the third quarter of 2024, a record 1.052 billion an increase of nine 2% over the same period a year ago.
Adjusted EBITDA for the company was also a record $178.3 million for the third quarter of this year compared to 87 $1 million the same period last year.
An increase of $91.3 million or $104, 8%.
I just did EBITDA was 16.9% of revenues in the third quarter of 2020 compared to 9% in the same period, a year ago and increase of 790 basis points.
You have heard John seat and Douglas describe the continued strong customer payment activity at each of our businesses.
However, given the continued uncertainties with respect to future government stimulus and related economic conditions. We have made no changes to the incremental covid specific reserves established in the first quarter of 2020.
While the portfolios have performed well and are in good shape. Today. We believe these reserves represent our best estimate of the potential impact we may experience in future periods.
We will continue to evaluate this stance each quarter and adjust as necessary.
Diluted earnings per share on a non-GAAP basis for the quarter increased 147% to $1.80 versus 73 and the prior year quarter.
Marilee due to the continuing string of customer payment activity and reduced inventory right off.
Operating expenses decreased $44 million from the third quarter last year, primarily due to a $47 million reduction in write offs across the businesses.
Cash generated from operating activities was 552 million for the nine months ended September 30th 2020 at the end of the quarter. The company had a cash balance of $470 million in debt of $285 million.
During the quarter, we maintained our quarterly cash dividend and did not repurchase any shares of the companies common stock.
In March of this year as a result of the uncertainty caused by the COVID-19 pandemic, we withdrew our full year 2020 outlook.
In early June and again in August we provided a mid quarter update we want to continue being helpful to our shareholders and analysts community I provided consolidated revenue and non-GAAP diluted EPS outlook for the fourth quarter.
We expect consolidated revenue in the quarter of between 1.025 billion and 1.045 billion and non-GAAP diluted earnings per share of between $1.20 and $1.30.
This outlook assumes no significant deterioration in the current retail environment or in the state of the U S economy, and a gradual improvement in global supply chain conditions.
Tomatoes, fourthquarter non-GAAP diluted earnings per share assumes no reduction in the Covid specific reserves established at the end of the first quarter of 2020.
Now I'll turn the call back over to Jon for some additional remarks.
Thanks Kelly.
It's always been about the team in there and it's the culture and the reason the business has had success. The team includes an amazing group of colleagues Board members advisors retail partners franchisees and suppliers the.
The list of people, who have made significant contributions to Aaron's success during my tenure as long.
It starts with our Fantastic Board of directors led by our Chairman Ray Robinson.
Along with Cynthia day, Doug Curling, Cathy Betty Perky, Harris will Amer, Kelly Barrett and Kurt domain.
In addition to our board there are many others, including Ryan Widdly, Steve Michael Douglas Lindsey Ravi cameras, <unk>, Robert Sinclair Cal Smith Guild, Danielson, Susan Hudson, Tommy Harper, Mike John again, David Cold.
<unk>, Ron Allen and the company's founder and longtime CEO Charlie Loudermilk it.
It takes an army to operate a business of Aaron scale, and complexity and through tremendous skill commitment and perseverance. The errands Army has delivered for our customers communities and shareholders.
It has been a real honor for me to be a part of it.
In closing I'd like to remind you what a great purpose Aaron serves both progressive and the errands business provide access to products that changed customers' lives in very positive ways.
The businesses serve customers ethically and at a consistently lower cost and with better service than anyone else in the market.
In addition, both businesses provide a great place for hardworking team members to build a career.
Aaron's has many amazing success stories of team members, who have spent their entire careers at the company.
Lastly, the company has a long history of giving back to the communities we serve through partnerships with world class organizations focused on at risk youth.
At Aaron's, we understand the importance of building up our communities and take great Pride in the work the company has done to do just that.
With that I will now turn the call over to the operator, who will assist with a question and answer period.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone if.
If you're using a speaker phone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Anthony Cucumber with loop capital. Please go ahead.
Good morning, everyone in congrats on a great quarter.
And I really appreciate your comments here at the end John It I feel good to be the end of an era, but rest assured I will still be covering both company. So so you're not going to get rid of me that quickly.
We don't want to get rid of you Anthony. Thank you [laughter]. So a quick question for I guess, a couple of questions for the first question Oh. So you know when you reported your second quarter, you guided to 80 to 90, which is well above consensus at the time then in early September mid September you got it to $1.40 to $1.50. So you hiked up that guidance.
And they were coming in well above that $1.80 and I would think that from the time that you gave that guidance to the revised to know any sort of you know.
Fiscal stimulus tailwind would have dissipated so I guess I guess my question is what do you attribute the the upside to your revised guidance down.
$42 50, because that's what it was very surprising to me.
Yeah anything I'll I'll take a shot at it I mean this is John certainly appreciate your comments.
To begin the question but.
Generally we have.
It's just been a very uncertain period, and we've had great results and we can attribute.
Part of that certainly to stimulus and probably a large part although there's a number of other factors customer behavior's changed we.
We believe in terms of where customers are spending money where their focus.
We've also done a lot of things internally in terms of levers with the Douglas and Steve of Cold to manage the business is through this.
But even having said that the visibility is just as poor going forward, it's been that way for us throughout the summer and was that way, we we've tried to maintain.
Kind of conservatism, how we're managing the business.
And we have been surprised to the upside which is a positive surprise, obviously, but we've maintained a pretty conservative approach to managing the business and.
I would just say, it's been better than we expected through through the third quarter and.
We've tried to give guidance.
Despite the limited visibility we've tried to give guidance.
A quarter ahead.
But no more just because of that limited visibility but.
It wasn't a certain outcome for sure. It's just been a lot of hard work by a lot of team members across both businesses to deliver and.
And they really have exceeded our expectations kind of.
Since this covid crisis hit frankly, they've just an outstanding job.
Got it that's helpful. And then just one follow up and I know, it's probably kind of hard to to answers, but just you know any thoughts that you that you have I mean.
Clearly as you talked about in the progressive business, there were some inventory shortages and consumer electronics and furniture in uhm and appliances and it sounds like there were even some inventory issues.
On the renters are sorry on the on the errands, but it's in the core business as well. So I guess, how do you think about you know how much you left on the table because of that right I mean, I I would almost think that you're that not only you could your third quarter performance was so you were gone for the fourth quarter could've been even higher even better you know if it wasn't for those for the.
Sure just how do you how do you sort of think about that yeah.
Yeah, I mean, that's a good point I will let Douglas answer after me because he has.
Certainly more specific data around the Aaron's business, but your point is good I mean, we definitely feel like we love some on the table.
Heard that douglas's comments around E commerce.
Across some of our retail partners on the progressive side. We've also experienced that so in terms of the supply chain disruption.
And I.
I don't know that I have a number for Ya Douglas maybe give you a little more detail around the Aaron's business, but I think your point is a given which is we do believe we have less them on the table, we let them on the table. There. We've also less them on the table in terms of our Decisioning, we took a more conservative approach to that across our businesses.
At the onset of the pandemic and we've been very careful about <unk>.
Changing that we've made a few changes Steve may talk about but.
That would be small and we're still I would say in a more conservative stance. We were this time last year. So.
All of those things I think of led to that but we're conservative management team just been kind of how we manage the business historically and we've kind of taken that approach through this but we definitely less them on the table if we'd known in March how strong customer payments were gonna be we might have done something different but we just didn't have that visibility and so we we.
Probably left on the table I'll, let Douglas answer about the supply chain in terms of we definitely pullback on our purchasing in March with sort of unclear outlook.
That really printed deficits in our fulfillment centers that are stores, we were able to.
Return product and we were able to scramble to get product in our stores, which was very resourceful for our teams both of the merchandising side and the operation side. So.
Less so an impact in the stores, maybe an assortment issue versus an absolute inventory issue, but we were definitely lighter in our fulfillment centers because of ordering new products and you saw that translated in the numbers into R. E Com business.
Probably more heavily than our store from business, but the good news is we are improving every day.
Merchandising team's doing a great job pretty much across all product categories. We're improving I think I mentioned at the end of the quarter were about 20% down on a per store basis versus last year or stores actually have a lot of inventory right now and we're pulling up or fulfillment centers and we're seeing a considerable improvement going into October. So we're feeling really good about the holiday season.
But it definitely had an impact on Q3.
Hi, Anthony so at the risk of repeating some of that this is Steve I will just say on the on the progressive side, we have seen.
Especially in furniture, but in electronics and appliances, well some disruption in the supply chain and that's more pronounced in the small and medium sized businesses as you would imagine they're probably in the last in line to get their <unk> fulfilled.
But we've also seen some change in behavior that our retail partners as it relates to inventory shortages and they're not being as promotional and that's.
<unk> isn't on their part because they're not wanting to take a short margin if they're quite an inventory, but we're even hearing.
From some of our partners.
Much of their product is sold on the truck before it even gets to the retail showroom and in that instance.
They're really only holding for cash sales are for personal credit card sales not necessarily point of sale financial point of sale payment options, so, leaving less kind of inventory available for us to.
Driving was volume for retailers and we expect that to continue to improve over the next several quarters, but it was an impact in Q3 and it will be a lingering impact in queue for hopefully not to the same extent.
Got it and not to Bogart, the Q&A, but just one real quick question any any update in terms of the filing of the form 10.
That we are the generally the spin process is going well I would say.
We're on a good trajectory, it's been going smoothly, thus far we still feel like we're on track for the.
Spin by the end of the year or maybe even earlier.
Obviously for that to happen that form turns got to be completed.
Pretty near future and so that's all going well and you would expect that over the next few weeks or so.
Got it thank you so much.
Yep.
Thank you Anthony.
Our next question comes from Kyle Joseph with Jeffries. Please go ahead.
Hey, good morning, guys.
Echo Anthony thoughts congrats on order and thanks for taking my questions.
Steve I think I'll start with you really want to get get into what's going on with invoice volume. Obviously, there's there's a lot going on you had the pullback of.
A traditional providers of credit some of your own.
Underwriting tightening and then some supply chain issue can you give us a sense for how invoice volumes trended throughout third quarter and then how they how they look in October.
<unk>.
Yeah, I mean, you you hit it.
You as far as kind of some of the some of the dynamics that we're dealing with.
And John alluded to it earlier as well.
We're not given kind of monthly insight on the on the months at this time and we haven't closed that October yet.
And I would I would be remiss if either to remind you. We are up against the very strong Q3 last year, even stronger 34% increase in Q4 of 2019, but having said that we are expecting to see a modest sequential improvement from the three 4% we reported in Q3 and Q4, so modest sequential improve.
<unk>.
We did.
Look for we are always looking for opportunities on the decision side too.
Good decisions for us as Jonathan where conservative team, we want to make good profitable decisions, but we also want to look for opportunities to use data to say, yes to more customers and be a better partner to a retail partners. So we did tightened back in March and that's certainly had an impact on an.
An invoice volumes and we use the pool data and the performance data.
Over the summer to learn and to look for opportunities to to.
Prove more effectively and so we have made some of those moves here subsequent to the end of the third quarter in October and.
And we expect that too.
To help in the invoice in queue for however, I would say is John already said, even after those moves were still in a more conservative posture than we were.
Three pandemic or at this time last year.
Got it that's very helpful and then in the third quarter Lisa.
Gross profit margins recover I know you you highlighted at 90 gave that activity is still up year over year.
But in terms of sequentially vec fewer 90 day by ads any data in the second quarter and and what's your outlook for the fourth quarter.
Yeah, 90 day continues to be <unk>.
Elevated it was flat to slightly down compared to Q too.
Q3.
The what you're seeing in the gross margin line is really the margin compression.
90 day being more than offset by the strength of the customer payment activity in the portfolio performance.
That as you know for the last couple of years.
Expenses.
Is above the line up and up and revenue now as opposed to down Opex. So that was the story on the on the 80 basis point gross margin improvement, we continued to see elevated 90 days even after the.
The stimulus mostly dried up at the end of July we continue to see elevated 90 days and we're predicting similar certainly elevated levels from last year.
Going on into Q4.
Got it.
And then.
Last question for me I think he talked about the share of E Commerce and progressive.
Accelerating from here.
And I know, it's still a relatively small percentages of business that can you talk about from a long-term perspective, how you see the balance.
For progressive going forward.
Yeah. Thank you yeah, we're super excited about E com in your eyes, the numbers are small, but they're getting they're getting bigger and they're growing fast certainly covid has accelerated many of our retail partners.
Investment into E Com I mean traditionally our application has been available on most of our retail partners websites.
That App channel has been strong and growing.
But more recently as you alluded to we've been partnering with our retailers to add progressive as a payment type in there and check out cars.
And we're continuing to invest in those capabilities.
Cause those retailers and have an ecommerce site and those are investing in those signs we're going to be the winter's over time.
It's it's my expectation and certainly our teams and our retail partners seems we're working hard to have progressive leasing as a payment type in all of our top retail partners online checkout experiences.
During 2021 is not there already.
Understood and one more from me.
Pivot to gather don't want to forget about you guys.
One thing that [laughter].
Since I get a lot of questions on the the sustainability as a positive results, but can you think it can you walk us through how you're thinking about the business.
Errands business specifically.
There is more stimulus if there's no more stimulus if there's less stimulus and how you are just positioning the business into 21, given the uncertainty there.
Sure I mean, you know obviously the business as a high operating leverage business and we've enjoyed.
Benefits of that over the last two quarters I mean, we we seem really strong collections in Q3 of this year we.
We attribute some of that stimulus and changes in customer spending habits, but Ryan Malone and our chief operator on the team have done a remarkable job. We've also gotten better centralized decisioning and I think we haven't talked about that this quarter yet but.
We've now got that rolled out it allows us really control a real skin and drive sort of retention of our customer base lower right off so that's exciting.
As we think about going forward certainly some of these external factors will normalize and we will get back to normalize levels of comps and write offs and we.
Expect our write offs and comps to revert back to a more normal range, but we're not sure when that's going to be in that will.
Probably be some time in early 2021, but that's all dependent on what's going to have one stimulus further stimulus in the economy and how this all plays out with Covid in customer spending habits. So I mean, I think as we look at outlook, it's really hard to say, we're just taking a quarter by quarter.
We believe in the fourth quarter, we will have positive.
Comps.
But gap written will still be under pressure probably negative pressure just because of our restricted lease decisioning, primarily and as we look into next year, we're going to be controlling costs and just looking.
What's going on with stimulus inflation's in the marketplace I will say the health of the customer in terms of.
Payments appear strong and the things we can control we're controlling so we're very optimistic about the tailwind in the business and we think there's a lot of demand and a lot of advancements we've made and if that's coupled with stronger customer dynamic. We think it's positive ultimately we look at the business in terms of EBITDA Marge.
Than not write offs and we.
We will continue to optimize our decisioning and expected rottol surround that to drive profitability the bottom line.
Great. That's very very helpful. Thank you guys all for answering all my questions.
Please call.
Our next question comes from Brad Thomas with Keybanc Capital markets. Please go ahead.
Alright, great quarter and.
Nice to catch up with you all sorry that the band has to break up but looking forward to working with you all.
Separately.
I wanted to ask about the the right off really just an exceptionally low number here for three Q as we knew from your pre announcement in the quarter Uhm I was hoping to.
Uhm, Yeah, Ryan Douglas She could you. Please talk about how much the low right off to a function of did this evening tightening that you guys have done versus more on the environmental factors.
Yeah, I mean I'll go first bread is John and I've tried to give her.
Kind of overarching comment I think and it's kind of <unk> reverts back to what I said earlier to Anthony but there. There's no question stimulus has helped both businesses.
Through the summer and.
No question, that's been been a tailwind four cuss.
Customer payments I will say, there's probably also a dynamic there that's been related to customer behavior changes and you've actually written about the idea that customers are spending more probably on their home less on other things like entertainment.
For example, sporting events or or travel that sort of thing or eating out and uhm. So we may be getting more kind of focus and share of wallet from that perspective, and then also the teams have made a lot of changes we went to a more conservative stance on decisioning at the onset of the pandemic.
Teams are both done a great job of digitizing kind of the payment.
Process for customers, making it easier and easier for customers to pay how they'd like to pay is conveniently as possible.
And so it's kind of a lot of variables that.
Are at play and it's really hard to decipher which have.
What impact, it's almost impossible to know, but we.
We do think it's a kind of a confluence of all of those things that have resulted in this good performance in.
Continuing to the third quarter, even as we got further from stimulus so.
Hard to know exactly how much each piece played but we do.
Believe that overtime is stimulus wanes and he knows what comes in the future, but if it if there isn't a feature stimulus we would expect it to return to more normalised levels, but there are some improvements we've made and maybe some customer behavior changes that may result in it being better longer. So we'll just have to wait and see.
It helps one we just trying to connect the dots.
From that commentary.
Commentary John to your your guidance, obviously, encouraging fourth quarter guidance, <unk>, well above where the where the street.
Is but you know it would seem to me that you're you may be modeling, a pretty big reversion back to with the right I'm trying to look like before what what are you assuming in terms of right off trends as we triangulate that tier earnings guidance.
Yes, it's a college Kelly.
I think we busy outline and our.
And our guidance right, we first and foremost Wanna call out that we're not assuming any additional significant deterioration in the retail environment.
U S economy right in its supply chain will get better also.
Assuming there there's no new seamless so with that would you start to revert back.
Some towards more normalized level, right, but but those levels still continue to be better than they have in the past so.
Again, better and historic levels, but not quite.
Quite as good as they were last quarter.
And Brad that really just gets to the lack of visibility that we have continued to have and.
We just we don't really we're doing the best we can to give them some guidance to investors to.
Based on what we know but.
Assuming they stay at the same rate, we just don't feel like it's probably the right thing to do but hopefully they stay that level, we just don't know.
That's great and just one last housekeeping, if I could John last quarter.
Commentary about uhm separating the two businesses would that there was really very minimal immaterial.
Costs associated with separating the two businesses is you guys thought as in cross tease here is that that's still the case could you just give me an update about how you're thinking about operationally. These two being <unk>, yeah, I mean, I think the way to think about it as they have been operated independently is and and that's really helpful from a.
Kind of operationally splitting these businesses the teams were largely already in place.
We did have some promotions and.
The CFO rolls on both sides, but both teams were very substantially built out.
But there are some additional back office costs will have to replicate to set.
Set these businesses free as public companies and there will be some additional costs, but maybe those longer term way to think about it we don't think that.
Those additional costs will.
Materially change the EBITDA margin profile of these businesses as you go forward so.
We won't.
Probably give any more.
<unk> and that at this point, but that's that's kind of the way to think about it and then I'm gonna have to talk about margin profile I really mean.
The more historic levels that we've seen.
Over a number of years, obviously the quarter was higher than normal, but that's kind of a way to think about it up I believe.
Great very helpful. Thank you so much.
Our next question comes from Jason Hoss with Bank of America. Please go ahead.
Great. Thanks for taking my question and congratulations to everyone on their new roles. So I wanted to ask a little bit more about invoice volumes for progressive so I I understand that.
About their be some inventory shortages, but our understanding is that some of those categories that you compete in my concern about tonics furniture appliances, those are still doing pretty well after the retailers. So I'm curious if there's anything that's may be hurting your penetration at the retailers related to what's going on with the pandemic. If it's like just employees.
Wearing mass or the fact that some retailers have these like plexiglass shields up or maybe there's just been more turnover kind of the focus is elsewhere. So I'm curious if if you think any of that it may be making it so that what we're seeing right now is not your longterm run rate for enforced volumes. Thanks.
Yeah, Jason Thank you uhm.
I mean those are interesting interesting.
Theories I guess I haven't I have to say I haven't heard of.
That there certainly has been turnover I mean, we've had rebuilt partner shutdown showrooms and furlough.
For the sales associates and not all of them have come back all I assume so there would be turnover maybe in excess of what they're normally isn't the retail environment, So and it's.
Part of our program to get out and to re train and redevelop those sales forces with their knowledge of our program. We are hindered a little bit in that because we're not traveling as much as we do normally in our field those sales team.
So.
So that could be an impact I mean, I think I mentioned that we are hearing anecdotally that there's more kind of cash and.
And personal card uses the historical levels and the retailers finance that.
As opposed to the point of sale financing options of the of the developed I think that has an impact.
Inventory continues does continue to be an impact in especially in furniture in in our in our retail partners, but I guess ultimately what I would wrap it up with US we do not expect it to be the long term.
Long home run right, there's definitely this dislocations and disruptions due to covid, though that we don't expect to be with us forever and.
We do expect.
Get back to the growth that we've enjoyed over the last number of years from a from an invoice growth standpoint.
Great. Thanks, that's helpful and then as a follow up question I also wanted to ask if you could talk a little bit more about just the overall tightening that you've seen the general credit environment Uhm and it sounds like <unk> make sure you guys. You are planning to maybe loosen up a little bit given the consumers performed.
Oh look better than I guess, everyone had expected. So I'm curious if you're starting to see that at all from some of the higher to your credit providers out there. They're also starting to loosen. Thanks.
Yeah. That's that's a good question we have seen the first part of your question of the tightening in the form of the average profile of the applicant.
Average profile of.
Of the approvals that we've done that's been in conjunction with.
Tightening actions that we've taken on our own as we've said previous calls it's very difficult for us to understand exactly what's happening above us in the credits back because in many in many cases, the there's a primary and secondary that is taking a look before it gets to us So we do.
Have some visibility into what's happening there and we here and we read in the press just like you do that there's there's still some.
The prime providers and supply is still there's still tight.
I can't predict.
Predict whether they're having the same kind of discussions internally about.
Prolonged customer strength and whether there.
Loosening or not but we are using the data that we have to make sure that we can.
Drive as much business and still at our at our targets as possible, but we have seen the tightening and we will continue to look at the data sources that are available to us to to see what those those trends look like in Q4 and into 2021.
Great. Thank you.
Thanks, Jason.
Our next question comes from Bill Chappelle withdrew Securities. Please go ahead.
Thanks, Good morning, I guess first for housekeeping you may have covered this <unk>.
Would you reverse some of the accruals in the fourth quarter, if if it doesn't.
<unk> <unk>, what you had reserved for.
Hey, this is Steve.
Are you referring to the Covid specific <unk> reserve that we have work because we obviously yeah. We evaluate yeah, that's what I figured we evaluate our reserves and the way we've been looking at this is on the progressive side, obviously the way we've been looking at this as we run our normal reserve calculations.
Each month and each quarter and really.
Study them very very.
Detailed as you can imagine and the fact that there's been fewer.
You are delinquencies and just great customer payment activity.
Yeah, it's difficult to reserve for something that's not there right you can't reserved for a non fast too.
<unk>.
So we are constantly reviewing that weather and we've got this kind of.
Non accounting term sidecar special reserve for Covid that we established in the first quarter and we continue to <unk>.
To look at it and decide each quarter, whether it's appropriate or not and we haven't really anything today, we will continue to evaluate it but at the same time, we we look at the uncertainty that's that currently exists and we believe can.
Can continue into 2021.
And that'll be a big factor into our determination.
The termination of whether the reserve is appropriate in all or in part.
As we finished 2020.
We did say I think specifically the guidance that we put out for queue for the consolidate level did not assume any reversal or relief of that Covid specific reserve.
Got it got it and then kind of follow up on the last page I mean, if there is any sense or is it too early to tell that the.
The the you know.
The tightening of credit standards, and you're getting maybe a higher.
Credit customer is that affecting 90 day payoffs and I mean would that continue to affect it as we move into the new year.
Well I mean, I think certainly are the profile of the customer and as John talked about the change in behavior of our customer whether it be our normal customer or slightly higher profile customer has impacted 90 day buyouts and it's.
It's been.
Tell you we expected.
August and September to see 90, they buyouts.
And decrease a little bit from the Q2 levels and they have stayed elevated.
And so.
Difficult to determine how much of that like the composition of the from a better credit quality.
Customer or if it's just changing payment behaviors and.
More liquidity from not spending money on other things difficult to understand exactly was driving that but we are planning for elevated 90 day buyouts.
Into the into the next several quarters.
Got it.
And then our last one Douglas.
Any sense that you know or concern if it would be that the strong, especially demand for home furnishings.
Since it started the pandemic pulled forward some potential holiday type sales or would impact it any way or is it is it still.
People are spending more time in their houses more things were breaking down or are they need more and so they're coming back into it's pretty steady how do you. How do you look at going into December specially.
Yeah, I mean, I think we've got a good plan going into the November December time frame I mean, nothing that we know would really sort of ultra what we how we feel about demand for everything I read and I think the analysts reports that have been ALS demand for home goods a strong.
There's a lot of discretionary income out there that's going towards that and so were super optimistic about that we've got Ah. Yes, you know, we're moving more of a marketing and towards the end of the year. We've got promotions that will go to the whole month of November and December this will spread out the benefit over that time period. So.
We're expecting normal behavior going into November December by Friday is our first big of that and we believe our inventories in a good position for that so we're expecting that as I mentioned to have slightly lower revenue written into the portfolio because of decisioning, but for inventory to be in a much better place.
Okay, great. Thank you.
Our next question comes from Bobby Griffin with Raymond James. Please go ahead.
Good morning. This is al contact minutes on for Bobby correct and thank you for taking our question.
Alright, I just wanted to start on the progressive side of the business operating expenses, excluding right off so impressive black rage and progressive can you talk about some of the driver behind this leverage and what portion of the cost savings might be sustainable going alright.
Sure. Thank you.
We.
Early part of the pandemic, we took some pretty decisive cost actions obviously the progressive.
A highly variable model so from an activity based standpoint.
The activity driven costs have been.
Down, but we also looks to reduce discretionary spend.
And and.
And just be generally tighter on spend while not as important point, while not cutting into the investment layer of.
A R. R E com in mobile App and all the all the growth drivers for the future. So.
Where we saw about 60 bps of operating leverage in the quarter.
We expect to see.
The full year substantial.
JA leverage 2020.
21, we haven't given guidance on yet, but we expect the some of the some of these costs will come back but.
And.
But we will continue to invest in the future driver. So we're basically still comfortable and confident.
With that 11% to 13% EBITDA margin goalposts that we put out there several years ago, because we are continuing to invest the head of the growth.
And are not optimized for margin, while while there's this big unserved opportunity out there that we think we're well positioned to go out and get.
Okay. That's helpful and then circling back to an earlier question could you quantify the percentage of retail partner that have added the progressive leasing could E commerce platform at the payment type and have you seen any difference in England fine when they do that it.
Yeah, we don't really we don't really talk about retail partners in their particular initiatives unless they do.
And certainly best buy was was one that has talked about adding E com.
This year and that's been very successful great partnership.
And we do see.
Very good applications and kind of composition of invoice volume from that channel.
It's important to note we think certainly E. Com is is a big driver in the future, but it's not completely incremental there's some channels shift, which we believe is perfectly appropriate because we want to be where the customers are and where they want to.
Prefer to shop so we've.
We have done become integrations with a number of a number of customers and.
Really just let the retailers speak for us and we follow your lead.
Our next question comes from Alex <unk> with bearing Bird. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions. Despite the strong numbers at Aaron's stores, we did see a dip in the customer traffic on the same store basis can you help us understand the foot and web traffic trends at Aaron's at the quarter progressed, especially after those enhanced unemployment benefits ended in July.
Sure, you're referring to our customer accounts being down.
Correct, Yeah yeah.
Yeah. So our customer account was down about three I think it was 3.7% which is actually one of the better quarters. We've had in the last three years Uhm, we have seen traffic soften through covid fewer people were going into stores, they're more targeted visits but the good news is R. E com traffic is at record levels.
And see a lot more people shopping online, but also paying us online. So our online payments spite considerably and that's benefited us enough.
A number of different ways to be more efficient in our operations and having higher collection. So we.
We don't necessarily.
Lower traffic in our stores, which is many times attributable to payments.
Is necessarily a bad thing and.
In terms of demand.
What we're seeing is strong demand I think that demand as being dampened a little bit in the numbers, you're seeing as I mentioned before by the Decisioning cuts. We've made in April those cards will be chomping over themselves are lapping over themselves for the next 12 months and we should see the second half of 21 that that Comping stop so.
We're overall optimistic think we've got a great plan for the holidays and I'm not concerned about customer traffic specifically.
Okay understood and secondly, just for modeling purposes can you give us any sense of the restructuring separation charges you expect for Q4.
Yeah. So we haven't provided any guidance on on those specific costs Alex.
What we did in the in the Orange release provided some information on the expense and and Q3, which is about $8 million. What I'd say is that if you think about this transaction the expenses that we incur there will be consistent with what you'd normally see for it's been like this.
Alright, I went out as you can see in our in our earnings that we do add that back as part of our non cap guidance are non-GAAP EPS that we reported for the quarter. So we will continue to do that in future quarters as well.
Our next question comes from Vinson can take with Stevens. Please go ahead.
Okay. Thanks. Good morning. Thanks for taking my question, then John Congratulations and I'll, you've achieved at Aaron's in the past several years <unk> talking to you on these calls.
Oh.
On the so question at invoice volume for both progressive and the errand business.
Understanding there's been some headwind from the the shortage of vegetable products.
Just kind of wondering if there's anything you can do there just to improve our incentivize and voice volume growth. So.
It sounds like for example, maybe penetration rate is slower just because of because there's more cash sales.
Then maybe if they're early payoff is being used more frequently.
Guessing that actually origination volume might be high, but I had been that offset some early payoff. So maybe you could get break that out and then if there's anything outside of just the loosening credit that you could do to improve and voices. Thank you.
They are as an all star. This is Stephen Douglas can take over but I mean, we're obviously always looking for ways to to drive more invoice with our with our partners.
And we have partnered with them in marketing and other promotional campaigns.
And we will and stand ready to do that continually this will be an interesting holiday season and that it won't be.
At least for most retailers, we're hearing won't be kind of an acute black Friday pocket all in there on Friday, but it'll be more spread out over the over the November and December timeframe. So.
We'll see how that plays out for us but we're.
As far as 90 day, Yes, 90 day.
It doesn't necessarily I mean, it doesn't necessarily have an impact on an invoice it will have an impact on.
Uhm portfolio size and on gross.
Gross margin.
And then to the extent that we can get a customer to repeat with us.
That would be that would drive invoice and we're doing a lot of a lot of great things to increase repeat business and drive are repeat customers into our retailers.
And have them benefit from from the preferred partnership and relationship, but 90 day doesn't necessarily.
Just directly correlate with with invoice.
Yeah, we're we're definitely looking at the Decisioning, but what we want to be measured and careful and that so.
We're just.
We've got we've got great plans with our retail partners were in great communication with them on how to.
How to be a successful partner in this holiday season, and in 2021 and beyond but.
Nothing nothing specific.
Yeah on the Arabs business in a 90 day is a much less material part of our business. We did see some increase in 90 day, but it was all set.
More than offset by retention of our customer and the lease portfolio and higher payment activity.
Lower return rates on our products, which is strong in terms of like our origination.
Number which is our revenue written into the portfolio that was down 14% as I mentioned in my comments. The biggest piece of that was a tough comp to last year against our sales training program.
And that was really a third quarter part of Fourthquarter type of initiative, we should see that normalize I did mention that we believe that it will be negative again in queue for and probably through April of next year, mainly due to centralize decisioning. So uhm so.
Supply chain has had an impact, but we see that normalizing in the fourth quarter and so really everything you see down is really love to do with.
External factors are more to do with what we're doing in the portfolio.
Thank you.
This concludes our question and answer session as well as today's conference. Thank you for attending today's presentation. You may now disconnect.
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