Q4 2020 Aaron's LLC Earnings Call
Yes.
Good morning, My name is Michelle and I will be your conference coordinator at this time I would like to welcome everyone to the Aaron's Company first quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Mr. Michael Dickerson, Vice President of corporate Communications and Investor Relations for Aaron's you May begin your conference.
Thank you and good morning, everyone welcome to the Aaron's Company fourth quarter 2020 earnings Conference call Joy.
Joining me. This morning are Douglas Lindsay Aaron's, Chief Executive Officer, Steve Olsen, Aaron's, President and Kelly Wall, Aaron's Chief Financial Officer.
Many of you have already seen a copy of our earnings release issued this morning for those of you that have not it is available on the Investor Relations section of our website at Investor Dot Aaron's dotcom.
During this call certain statements, we make will be forward looking including our financial performance outlook for 2021.
Actual results in the future may be materially different than those discussed here. This.
This could be due to a variety of factors, including among other things uncertainties associated with the duration and severity of the COVID-19, pandemic and related impact on the economy and supply chain.
I want to call your attention to our 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 content of our forward looking statements also please see our form 10-K for the year ended December 31, 2020, and other periodic filings with the SEC for a description of the risks related to our business that may cause actual result.
To differ materially from our forward looking statements.
Listeners are cautioned not to 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 certain non-GAAP financial measures, including EBITDA and adjusted EBITDA non-GAAP net earnings and non-GAAP, EPS, which have been adjusted for certain items, which may affect the comparability of our performance with other companies.
These non-GAAP measures are detailed in the reconciliation tables included with our earnings release the.
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 company's ongoing operational performance.
Let me add one comment as it relates to our basis of presentation.
For the month of December 2020, our results represent the consolidated statements of the company and its subsidiaries and is based on the financial position and results of operations as a Standalone company.
For all periods prior to December one 2020 combined financial statements include all revenue and cost directly attributable to the company and an allocation of expenses from our former parent related to certain corporate functions and actions a more detailed explanation of our basis of presentation can be found in our form 10.
K filed today.
With that I will now turn the call over to our CEO Douglas Lindsay Thanks, Mike and thank you for joining us today.
First let me take a moment to recognize all of our talented team members for their determination and commitment in 2020, which enable the aaron's to accelerate our key strategic priorities in a very challenging year.
Our fantastic team members at our stores distribution and service centers Woodhaven manufacturing and store support center worked tirelessly to provide products and services to our customers, while accelerating our digital and real estate transformation.
We overcame the challenges posed by the COVID-19 pandemic, while continuing to meet the needs of our customers and safeguarding our team members.
At the same time, we delivered annual revenues exceeded our expectations for the year.
And then adjusted EBITDA, there was higher than we've generated in several years.
In addition, during the year our teams worked diligently to establish Aaron's as a new standalone publicly traded company the.
The spinoff transaction closed on November 32020, and following the spin we are well positioned with a strong balance sheet and cash flow profile to execute on our go forward strategy.
While some uncertainty remains regarding how the coronavirus may impact the economy or consumer behavior, I'm more energized and optimistic about our future than ever our business has never been more nimble and we continue to make investments in technology Decisioning E Commerce and store operations that are yielding higher productivity.
<unk> and lease portfolio performance.
In the fourth quarter of 2020 same store revenues rose three 4% as compared to the prior year quarter, primarily due to strong customer payment activity improving lease portfolio size and higher retail sales.
The fourth quarter was the sixth out of the last eight quarters with positive same store comps with 2020, representing the first annual positive same store revenue growth since 2013.
Additionally, we ended 2020 with a larger and healthier lease portfolio than we had at the beginning of the year.
The larger portfolio size as a result of better collections fewer product returns and lower write offs, which was enabled by improvements in operational execution, the rollout of centralized decisioning technology and enhancements to our customer and payments platform.
We achieved this larger portfolio. Despite revenue written into the portfolio that was flat in the fourth quarter.
Recall that our implementation of Decisioning technology in the second quarter of 2020, effectively reduced new lease originations and therefore revenue written by 6% to 8%.
Moving to our ecommerce channel.
Revenues grew 39% in the quarter and represented approximately 13% of total lease revenues compared to 10% in the fourth quarter of 2019.
Thanks to the tremendous efforts of our team traffic to our Aaron's Dotcom site continues to increase year over year as our customers are increasingly going online in search of affordable products for their homes.
In the fourth quarter E Commerce traffic was up 29% compared to the fourth quarter of 2019.
Despite the significant increase in traffic to Aaron's dotcom.
E Commerce recurring revenue written into the portfolio declined one 2% as compared to last year's fourth quarter due to both decisioning optimization and lower conversion of traffic.
Conversion is not where we would expect it to be due to the inventory shortages, resulting from the global supply chain disruption.
However, our inventory position continues to modestly improve in the first quarter of 2021, which should lead to higher conversion rates.
I'm encouraged by the progress of our ecommerce initiatives, including our evolving analytics and digital capabilities.
Improvements in online customer acquisition conversion and Decisioning are leading to margin growth and continued positive momentum in this important channel.
In 2020, we also accelerated our strategy to consolidate remodel and reposition our store footprint with our new Gen. Next store concept, which includes enhanced showrooms digital technologies expanded product assortment and improved brand imaging.
As of the end of the year. We had 47 Gen next doors opened and have more than 60 additional stores in the 2021 pipeline.
Our <unk> stores are performing well delivering new lease volumes that are higher than our corporate averages and in line with our expectations. While the new store is still represent a small portion of our overall store count.
We believe over time, the execution of our agenda store strategy will provide meaningful lift to our overall performance.
Overall, I'm pleased with our full year of 2020 and fourth quarter results and I am encouraged about the future and our new chapter as a financially strong standalone public company.
As we look to 2021, we remain focused on our key strategic initiatives of simplifying and digitizing the customer experience.
Aligning our store footprint to our customer opportunity.
And promoting the aaron's value proposition of low payments high approval rates and best in class service.
I'll now turn the call over to our Chief Financial Officer, Kelly Wall to discuss our financial results.
Thank you Douglas for the full year 2020, consolidated revenues were $1 $73 5 billion.
A decline of two 8% compared to the full year 2019.
This decline is primarily the result of a reduction of 253 company operated stores in 2019 and 2020 <unk>.
Partially offset by a one 8% increase in same store revenues for the year adjusted EBITDA for the full year 2020 was $208 9 million, an increase of $43 6 million or 26, 4% compared to the full year of 2019 as a percentage of.
<unk> adjusted EBITDA was 12% compared to nine 3% an increase of 270 basis points over the prior year.
This increase in adjusted EBITDA is primarily due to an improvement in customer payment activity fewer lease merchandise returns and efficiencies in store operations, including pandemic related to staffing reductions and the second and third quarters of 2020.
Write offs were four 2% of lease revenues in 2000 2200 basis point improvement over 2019.
Annual non-GAAP earnings per share was $3 <unk> and 2020, an increase of 43, 8% compared to $2 10 for prior year 2019.
Turning to the fourth quarter of 2020 revenues were $430 million.
A decrease of approximately 1% compared to the same quarter last year. Despite the closure consolidation and acquisition of a net 75 company owned locations throughout the year.
Adjusted EBITDA was $53 7 million for the fourth quarter compared to $51 2 million for the same period of 2019, an increase of $2 5 million or four 8%.
Adjusted EBITDA margin was 12, 5% of revenues compared to 11, 8% in the same period, a year ago, an increase of 70 basis points the.
The improvement in Q4 of 2020 adjusted EBITDA margin was primarily due to the reduction in inventory write offs, partially offset by the comping over the impact of one time benefits realized in the fourth quarter of the prior year period.
These onetime items in 2019 related primarily to gains from real estate sale and leaseback transactions and other miscellaneous items.
Excluding these onetime items from 2019 adjusted EBITDA margin in the fourth quarter of 2020 would have improved approximately 250 basis points.
Diluted earnings per share on a non-GAAP basis for the quarter increased 11, 3% to 79.
Versus <unk> 71 in the prior year quarter, primarily due to the continuing strength of the customer payment activity and reduced lease merchandise write offs.
Operating expenses were down $1 $2 million as compared to the fourth quarter of 2019, primarily due to an $11 $7 million reduction in write offs offset primarily by an increase in advertising spend and the previously mentioned benefit of real estate transactions that took place in the fourth quarter of the prior.
A year during the fourth quarter of 2020, the company's store labor expense increased compared to the second and third quarters during which labor expenses were lower due to pandemic related store closures and furloughs.
Write offs in the fourth quarter were four 3% down 300 basis points from the prior year fourth quarter.
Due primarily to the implementation of our new Decisioning technology improved operations and the benefit of government stimulus cash.
Cash generated from operating activities was $355 $8 million for the 12 months ended December 31 2020.
Cash from operating activities grew 169 $8 million year over year, primarily due to improved leased portfolio performance lower inventory purchases and one time tax benefits, resulting from the cares act, partially offset by other changes in working capital.
At the end of the year the company had a cash balance of $76 $1 million and less than $1 million of debt. In addition, concurrent with completing the spinoff transaction on November 30th the company entered into a $250 million unsecured revolving credit facility, which was undrawn at the end of 2012.
<unk>, giving the company more than $300 million of liquidity as of year end.
Before I review our outlook for 2021, I want to remind you all that in November prior to completing the spinoff transaction. The legacy combined company accelerated the payment of its regular quarterly cash dividend, which would normally have been paid in January 2021.
Turning to our 2021 outlook. We currently expect total revenues in the range of 165 billion to $1 7 billion. This represents a $50 million increased the bottom end of the preliminary outlook. We provided in connection with our spin off Road show in November which is summarized on.
Slide 17 of the Roadshow presentation and is available on the Investor Relations section of our website.
Adjusted EBITDA is expected to be in the range of $155 million to $170 million, representing an increase in the midpoint of our outlook as compared to the preliminary outlook. We provided in November.
As it relates to the seasonality of our financial results, we expect that both revenues and earnings will be somewhat higher in the first six months of 2021 compared to the second six months of 2021.
Free cash flows, which we define as operating cash flows less capital expenditures are expected to be $80 million to $90 million capital expenditures are also expected to be between $80 million and $90 million for the year.
This outlook assumes a few key items, we want to highlight.
No significant deterioration in the current retail environment or in the state of the U S economy as compared to its current condition.
Second a gradual improvement in global supply chain conditions, and finally, no incremental government stimulus or supplemental unemployment benefits.
To summarize 2020 was a successful year for Aaron's despite the many challenges our team members and customers faced.
To Echo Douglas's earlier comments I am encouraged by the opportunity ahead of us the unique nature of Aaron's recurring revenue business model combined with our strong balance sheet cash flows and operating leverage enables us to perform well during this period of uncertainty.
With that I will now turn the call over to the operator, who will assist with the taking of your questions.
Thank you if anybody has a question. Please press star one on your telephone keypad.
And that is one on your telephone keypad.
First question will come from Anthony should comeback from loop capital markets. Your line is open.
Wow I got to ask the first question on your first call as a publicly traded company.
Yesterday, the company I am honored honors.
Thank you Anthony.
Congrats on a great finish to a great year.
I guess I have a couple of questions. My first question is on capital allocation.
We ended the year with essentially $76 million cash.
Cash and virtually no debt.
We're going to generate another $80 million to $90 million of free cash flow and your stock is trading at.
It's kind of a stupid low multiple.
So I guess I'm just wondering how you think about capital allocation.
In terms of cash dividend.
Sure.
Yes, Anthony Hey, this is Douglas thanks for being our first question on our first earnings call I'm glad to heavy here.
So we've actually we've got very nice set up on our balance sheet as you mentioned and great cash flow prospects.
As Kelly mentioned in 2021.
We're going to be deploying.
A bit of that cash Kelly laid out into internal investments in technology, and our real estate strategy and thats been laid out in our.
In our outlook, we continue to focus however on returning capital to shareholders and it was super important to us.
As you recall at the time of the spin when we did the road show, we indicated that we expect to pay a dividend of $10 million to $15 million.
Annual cash dividends.
And that continues to be our expectation.
Kelly mentioned in his prepared remarks, we did accelerate our normal January dividend into November of 2020. So.
So our shareholders wouldn't miss a payment while our new board.
Normalized is that dividend policy and makes plan for the future and the future of our capital structure. So that's all in process. We've also historically used share buybacks in the past to return capital to shareholders is something that we've been discussing and we'll discuss as a management team.
The board and we'll give you more information on that in the future if that.
Is something we want to pursue and lastly, I would say on this is while.
While M&A activity is not our primary focus right now we are open to looking at strategic opportunities as they arise and we will continue to do so as part of our direct to consumer strategy and sort of sort of.
Pursuing our core strategy in the business. So I've listed these specifically in the order of focusing on executing our existing strategy is returning capital to shareholders and opportunistic M&A as we look to the future.
Got it that's helpful. And then just one follow up question. So in terms of the guidance you talked about the fact that you expect.
Sales and a slightly stronger than first half.
Second half.
Assuming next.
We're seeing some lingering impact from the stimulus I know the compares a little bit easier in the first half.
Close.
So my question to you.
Stan.
No.
Consumer stimulus measures enacted and I know that.
The finding of illustrations.
One of the packages right now.
Is it safe to assume that there would be upside.
Guidance.
Yeah, Hey, Anthony it's Kelly.
You are correct as we pointed out on our call our outlook does not include any benefit.
Incremental stimulus that may be passed this year. If you look back at last year, certainly, we and others benefited from the stimulus that was pushed into the market, but again, it's difficult for us to forecast.
Exactly what impact that that's going to have on our business, which is obviously why we didn't include it in our outlook.
Few things to note right. While there is generally consensus it seems around the size and the makeup of of what stimulus may look like we don't know when it's going to start we don't know.
Formerly when it's going to end either right. So it makes that a little bit challenging the other thing thats unique this year.
As we were going into the pandemic in early 2020.
The economy was in great shape unemployment was at record lows, our customer was in a really good spot as we sit here today, obviously unemployment is elevated.
Customers, we believe are behind in rent payments and other obligations that they have so we don't know exactly how they may use that stimulus when it comes available to them relative to how they use it last year and finally, I think we'd be remiss to not point out that there is some uncertainty around the tax season. This year we.
<unk> is delayed.
Know that Theres, a high probability that our customers will have some liabilities. This year that they haven't had in the past. So when you when you put all that together it makes it very difficult to forecast, but as a general rule, our customer whether it's due to <unk>.
Rising wages, right, increasing employment or government stimulus when they have greater liquidity, we tend to do better.
Got it Thats very helpful. Thanks, Thanks, so much guys keep up the good work.
Thank you Anthony Thank you Ed.
And your next question will come from Kyle Joseph from Jefferies. Your line is open.
Hey, good morning.
Congratulations on a good quarter.
Regarding the outlook to your point.
Is better than when you provided in November can you give us a sense of that because you had a bigger portfolio at the end of the fourth quarter was that because of some incremental performance following the stimulus in December and what.
Really drove the improvement in the outlook.
Yes. It was it was really a few things Kyle So we did continue to have strong collection activity right as.
We believe as we move through the end of the year that was less impacted by stimulus and continue to be positively impacted by the rollout nationally of our centralized decisioning platform earlier in the year as well as just the incredible performance at our operating team is putting forward in the field.
So those are those are two things that continue to kind of drive that.
Other is.
Our ending the year slightly higher.
Then what we were thinking as we were completing a roadshow.
And then to a much lesser extent, we did get some stimulus in December which which has helped in the first few weeks of the first quarter.
Got it and then just one follow up for me.
Focusing on credit is 'twenty, one sort of anticipate write off levels normalizing.
And then can you walk us through.
The outlook for credit performance in Canada post centralized underwriting how performance has been versus your expectations and then I guess the third leg of this question would be highlight how our E. Commerce performance has been versus your expectations.
Yeah, Karl as Douglas I'll, let Kelly talk about the outlook and what we've assumed there, but I'll just make a general comment on.
As you know and just to remind everybody we rolled out centralized decisioning in the second quarter of 2020.
A large piece of our portfolio now has been centrally decisions, while we can't exactly differentiate our collections are strong collection performance. This year, how much was related to that versus.
Stimulus, we do look at the pools by sort of scoring bands and we have great confidence that centralized decisioning is improving our results.
So we're keeping customers.
In the right sized deal and making it stronger and healthier portfolio as we move forward. So that's been really successful I think.
Biggest win there is probably the reaction by our team members and simplified processes in our stores and made us more efficient in our labor model, which is great and sort of a win win from all sides for Aaron's for customers and for our team members.
In terms of E commerce.
This is again a big win as you know we had centralized decisioning and E commerce for a long time, we've been continuing to optimize our models there.
And really restrict and we've commented on this on our recurring revenue written was down part of that down in recurring revenue written was us further optimizing our decisioning on E com and that has really benefited us over the course of the year and by the end of the fourth quarter. We were seeing losses that were close to half of what they were.
The previous fourth quarter. So we're seeing considerable margin flow through in E Com and we're really happy about the Decisioning there I'll, let Kelly talk about 2021 write offs yes.
So Kyle.
Obviously enjoyed.
Lower write offs this year than we experienced last year and also lower than what I would consider our normalized historic levels.
As it relates to our outlook, we do expect to start to return back to those more normalized levels as well I believe on during our Roadshow discussion I had put out there a range of 4% to 5%.
In 2021, and we currently expect that the year will play out in that in that range.
Taking my questions and congrats on a 10 to 2020.
Thanks, Joe.
And your next question will come from Brad Thomas from Keybanc Capital. Your line is open.
Hi, good morning.
<unk> Kelley, Mike, Let me add my congratulations as well on a great year, and a first quarter, Arizona public company.
Thank you, Brian why don't I.
Sure sure.
One of my first question I have two questions.
She is going to be around.
How you all are thinking about right.
Write offs and you've addressed this a bit.
But at this point.
Ill, just kind of looking at crystal balls and figure out how we will.
Behaviour in America change over the next you know.
12, 24 months ahead, but how are you thinking about what normalized write offs.
Particularly as a vaccine gets out there and some of the stimulus gets behind us.
Yes.
Couple of thoughts on that if you looked at our total collection percentages forget write offs last year in 2020, we were collecting.
200, plus basis points higher on our portfolio than we had if we look at the historic here's the five years prior to that sort of a normalized range.
While we believe that stimulus help that.
We think as a vaccine rolls out and those potentially we get more.
Stimulus and that there will be a normalizing of write offs over time I'm sorry.
As we move into the year, we'll see more normalized if we get further stimulus we should be supported in some way that that 200 basis points of improvement is not necessarily all stimulus.
It also included the benefit of centralized Decisioning was Kelly mentioned and so.
As we look forward if we have no stimulus we would expect it to revert back to kind of our five year averages, which is losing the 200% and that obviously translates into but its revenue reductions in the portfolio because revenues are collected revenue another potential revenue and it also translates into write off performance, which we would see.
Normalizing as well so Kelly I don't know if you have any additional comments to them not a covered to call. It okay.
That's great and then.
And then my next question my.
Follow up question Douglas, who is going to be if you could help talk about.
Some of the things you're doing with E commerce and with customer retention.
Given the changes in the competitive landscape.
And I would say that I'm on the receiving end of more calls to look at this space in a long time given.
Specs that are happening in the group and acquisitions as DTC players that are occurring.
And.
So it seems that competition is definitely heating up on the other hand, you have just put up three of the best quarters of same store sales in a long time. So I was hoping you could talk a little bit about the competitive landscape and.
How do you feel like you're in store offering and ecommerce offerings are perhaps.
Better positioned than maybe investors perceive to face the competition. Thanks.
Sure I mean first of all would you say.
I'm really proud of what the team has accomplished over the past five years.
We've modernized our platforms, we've centralized processes, we've built a fully transactional E commerce business at scale and our analytics and data systems are driving value in our company every day.
All of this is on the back of a growing E commerce platform in an omnichannel experience.
Experience for our customer that we think is is.
Definitely leading in the industry.
As you know E. Com has always been a competitive advantage for us we've got a large store network that we can leverage we've got supply chain last mile logistics and as we grow that.
We really feel like we can drive margin performance over time also importantly, we are acquiring an E com or younger.
Newer customer to Aaron's many of those that are shopping.
On our E com site after our store hours and so we think we've got a huge benefit of our embedded infrastructure and layer in E. Comm on top of that as you saw in the quarter.
We continue to drive more traffic to our site I think the big number there was traffic was up 29% in the quarter. Thanks to the terrific work that our teams are doing in customer acquisition and search ad.
And conversion of that traffic, while lower during the quarter due to inventory has also been improving over the course of the year and we expect that to get back to normalized levels. In 2021. So we're super excited about that it's currently 13% of revenue we expect it to be a bigger part of the business as we move forward.
And as I mentioned on the last.
Questions from Kyle probably what's most encouraging is the is the control of the health of the E comm portfolio and the loss rates that have been coming down. So as we think about E com, where kind of it I mean, even though we feel like we're in late inning, three or really feel like we're in any one we've got a lot to do I'm gonna, let Steve just talked to.
Briefly about our roadmap forward on E com sure. Thanks Douglas.
As we discussed in the Investor Roadshow, we have a multiyear road map.
To drive our E com business really focused around digitizing that journey for the customer and then putting them in control and a few things in 'twenty one that that we're working on in this area first I'd call out personalization.
We want to continue to connect our site to where the point of entry for the customer and then give them content that's relative maybe to their prior site experience.
We want to continue to enhance the shopping experience whether that's content.
Better filtering, our functionality and <unk>.
Obviously, an expanded assortment that we continue to add too we're going to continue to focus on our site performance to make that a great experience and hopefully remove any friction for that customer and modernize our self service platforms. It really putting the customer control, allowing them to really manage their account they are payments get get servicing that they need.
And ask any questions. So we're really excited about the roadmap we have re com and it's really going to build upon as we move throughout the year yes.
So.
I think as we look to the future of direct to consumer online is hugely.
A big part of our strategy and strategy and hugely important to us we're adding more products.
We will be looking at any and all things that can help advance us in that area.
And Brad it's Ken I'll add one more thing to add that we view as a differentiator around our model.
We take a true omnichannel approach and stores are a key element of our strategy, which enables the return of product from customers. So that is a few things right, obviously better experience for our customer and the second thing is that with returns with that model. We can go deeper into the risk portfolio to serve more.
Customers and finally were able to extend terms so up to 24 month terms, which allow for lower monthly payments of our customers.
Perfect. That's all really helpful. Thank you all so much.
Thank you.
And your next question will come from Bobby Griffin from Raymond James Your line is open.
Good morning, everybody. Thank you for taking my questions and congrats on having to spin done and now operating as a public company on your own.
Thanks, Bob.
I want to dive a little bit into 2021 guidance and just maybe understand a little better what's assumed for written revenues into the portfolio in 2021.
We start to lap the centralized decisioning.
Changes you guys made in <unk> 2021 could revenues then start to grow back into the portfolio as we lap that.
Yes, so Bob.
A few things going on there as it relates to the portfolio.
Obviously as part of our real estate repositioning.
And remodeling strategy, we expect to continue to consolidate stores as we laid out in the road show over the next five years.
There is kind of 20% to 30% of our current company owned stores will be merged into existing stores within markets that lead to a reduction in the portfolio.
But I would say that on a on a on a same store set alright.
Alright, we have a combination of continuing kind of at our current pace of revenue written in.
But at the same time Youll collections as we've mentioned before.
We will begin to return to more normalized levels, we believe that offset though in terms of the impact that has on revenues with a higher quality portfolio. So one of the real benefits to our centralized decisioning is that we sit here today with a much higher quality book.
Book of leases and so as we collect more on those leases and have less returns as a percentage of the total pool.
Expectation is that will ultimately result in kind of zero to 2% positive comps for the year.
By the way.
Sorry.
Yes.
Go ahead I'm sorry.
The way I think about it is.
We'll be comping through the second quarter against that.
Revenue written so our approval rates are down 6% to 8%. So you should expect pressure over the first two quarters against the prior year and then a relief of that pressure in the second half of the year I think one of the bridging items and Kelly was getting too on same store revenues is that well.
Revenue written into the portfolio as a leading indicator of the size of the portfolio. So as what we churn out of the portfolio and last year, we churned out considerably less customers than we had previously and we've mentioned that that product returns were lower as were write offs and that's a component of.
Our portfolio health that we're keeping customers in the portfolio, we would expect.
In 2021 to have higher churn than we did X stimulus that we did in 2020, which puts pressure on the portfolio and therefore, even though we have a larger size to begin the year, obviously are more normalizing and that's why we're guiding towards zero to 2% same store sales.
Okay. That's helpful. Yes.
Bright clear my question now, but I was thinking more on a on a comp basis. Realizing you guys are closing stores just for modeling purposes is there is there a rough estimate of store count that closures that we should assume a relocation that we should assume in 2021 of our models.
Yes, I think our plan. This year is probably be closed roughly 50 stores.
Okay, Okay, perfect and I guess lastly from me you mentioned you saw a little bit of uptick with the recent stimulus I think the $600 checks, but just just looking at that with the customer behavior similar to the first stimulates ware.
The prepayments or what they looked at or what they bought or just anything to help us think about how your customers.
Behave this round and maybe we can kind of translate that a little bit into what would happen. If there's another round of stimulus verse. The first time, we got it back in the summer months.
Part of the pandemic.
Yes, Bob that's a great question I mean, unfortunately, its very difficult for us to answer right because I mean first when that first round of stimulus came in but we also rolled out centralized decisioning nationally there was also.
Improvement in.
Operations under our.
Our new Chief store operations Officer, Ryan Malone that was driving that as well so it's hard for us to disaggregate exactly how much of the lift that we saw in 2020 attributable stimulus you put on top of that.
The way, it's rolling out as different so you might recall that customers receive this formulas over a longer period of time.
Back in Q1, and Q2, whether that was when checks being melt them or just delays in the chronic transfer of funds.
And on top of that the one time stimulus also included.
<unk> weekly unemployment benefit you roll forward into December what did we see right. So the $600 rolled out it rolled out much quicker because.
Folks were expecting it.
And it was more quickly delivered on top of that $600 did not include any monthly unemployment benefit which quite candidly I think as we sit back and think about it.
Bigger driver of the stimulus because we benefited from that over a period of months in 2020, whereas the $600 stimulus in December was a one time pop at the same time and I mentioned this earlier our customers are just in a different spot at the end of 2020 in the beginning of 2021 than they were.
In the pandemic, so how they used the stimulus.
It was likely much different.
Okay. That's helpful. And then I guess lastly for me just on the supply chain.
I called it out in the relief that the guidance assumes moderate even getting a little better but when we look at it sequentially has as all categories that were seen issues started to improve or has there been some categories that have taken a step back.
In terms of availability or.
Or are we moving in the right direction across the board.
Hey, Bobby this is Steve I'm glad to answer that.
I would say that we're seeing moderate improvement across all categories.
So.
From a demand perspective, youre seeing that.
The categories that throughout the summer and into the fall that we're continuing to grow whether whether it was appliances computers things like that but from a supply perspective, we work.
Daily with our suppliers to pre plan the flow of inventory when that coming and what their outlook is so.
We're optimistic and believe that we will see continued modest improvement across all our categories as we move into 'twenty one.
Great well I appreciate the details I'm best of luck here in the first quarter.
Thank you.
Your next question comes from Alex <unk> from Barron Burke Your line is open.
Good morning, guys. Thanks for taking my questions just starting with a macro level. One can you discuss the impact that a minimum wage increase would have on your business from both an expense standpoint, as well as how it how it may change your customer profiles.
It's a great great question Alex.
So the $15 minimum wage first want to point out a few things right.
It's kind of working its way through the system in D C.
There seems to be some consensus around how that may look, although there doesn't seem to be consensus yet that is going to pass but in terms of how it's going to look at would be phased out over a five year period.
And with that.
We can say is that in 'twenty 'twenty. One so this year there would be no impact to our personnel expense.
If it goes through as contemplated and then as you roll into 2022, the impact on our business would be less than $1 million in terms of the increase to personnel expense beyond that it just becomes much more difficult for us to kind of forecast because there's a few moving parts right. We are continuing to consolidate our.
Stores were also continuing to invest in technology, which not only improves the customer experience, but it's also improving our efficiencies so.
Again, while no impact this year modest impact in 2021 beyond that difficult for us to forecast as our operations continue to evolve yes, Alex and this is Douglas it's important to note that our base wage rate across our store networks is close to that number and we have also variable pay that is well in excess of that.
Number and so our comp ranges or are higher than the $15 in total.
On average across the portfolio.
Okay No understood. That's really helpful. And then just a follow up on the comments you made regarding inventories in the supply chain at the moment how much revenue do you think was left on the table in 2020, and then how do you make sure customers come to Aaron's before other peers once appliances and electronics in particular get restocked.
Yeah sure. So this is Steve I'll answer the second half of the <unk>.
<unk> first.
Through all of our marketing.
Whether it's broadcast whether it's email whether whether it's digital we are weekly.
Marketing messages around our assortment offering around our price points.
And really tying that to our value proposition in our YY, we think.
Aaron's is a great place to shop.
And.
We are seeing we're seeing the benefits of that.
Through Q4 and the performance.
As far as.
Impact of inventory I guess earlier and earlier in 2020 and as it moved through.
Tough to quantify.
I'd say that.
Like most people out there.
We saw probably a low point.
During during the summer months, but that has that is continuing to improve what we definitely can say and we mentioned in our prepared remarks is definitely we saw an impact.
<unk> E com.
As our E. Comm business is supported by our new inventory that we carry in our fulfillment centers, but we have the luxury of having pre leased are returned merchandise in our stores. So that's allows us to balance our inventory between new and improved products.
Throughout our network.
I think it's also important to note.
We serve a large target market.
Roughly 30% of the U S population with products that they look for on a payment and that's what really differentiates us.
And we believe our payments are very competitive in the marketplace and that combined with our high approval rates and best in class service I think it's a compelling value proposition for our customers and that's why customers continue to shop.
As part of our strategy will continue to evangelize that and use that in our marketing and other customer acquisition channels and we think we've got a lot of room to run there. So we're super optimistic about that.
And the technology and support systems that we put behind it.
Alright, great. Thank you both.
And our next question will come from John Hodge from Bank of America. Your line is open.
Thanks, Jason.
Thanks for taking my question.
So Jason I.
Hey, guys. So I wanted to ask on Decisioning, maybe if you could provide some color on whether that's.
<unk> been able to loosen that at all relative to <unk> just given.
Stimulus thats coming it sounds like maybe maybe your customer base, maybe more mixed in terms of the health of them.
Yes.
But yeah, just curious any color on.
How that decision in comparison.
Yes.
I don't want to speak specifically to any loosening or tightening or anything else. We have done what I will say as we continually optimize our decisioning and we did so all of last year 2020, we were optimizing our E comm Decisioning, which.
Led to great benefits in that portfolio for us and as we rolled out our centralized decisioning in our stores. We've continued to see performance of lease pools, and we're optimizing some of that optimization is giving sort of are higher.
<unk> customers in our in our Decisioning matrix.
More purchasing power with us and some of it is finding areas, where we need to.
Sort of adjust our model and so I think we've been doing that over the course of the year and we're seeing the benefits of that and we will continue to do that on a monthly basis.
Great. Thanks, and then a follow up question, a little more longer term focus.
Is there still an expectation that I understand EBIT will be down year over year and 2021, but I think there was an expectation that it would grow after that Judith store consolidation strategy. So I'm curious if that's if that's right. That's how we should be thinking about it longer term.
Jason Yes. It Kelly you are correct and continuing to think about it that way you recall correctly in our road show presentation, we did outline kind of a five year view and that included.
Sequential year over year growth in earnings after kind of this 2021 reset yield ear. If you will revenues are expected to decline at the front end of that five year period.
And in about mid way through reverse course and start to grow.
As we continue to rollout our.
New stores and see the benefit of of those stores and kind of the growth that they are currently demonstrating and that kind of takes.
A larger percentage of the portfolio and translates into both topline growth and bottom line growth.
Great. Thanks, and if I could add in one more question you mentioned that staffing levels have picked up I think sequentially quarter over quarter I think I know there were some cut there due to the pandemic, it's been tough to get a read on that just because I'm not sure to what extent centralized decision, making has allowed you to take out some labor hours. So im curious if <unk> staffing.
Levels have returned to normal or are we still running at a lower rate because of the pandemic or.
Is there sort of like a lower term long term rate because of that centralized decisioning.
Sure Jason It's Douglas.
First of all we're open for business and all of our stores across the U S and Canada right now and so what you are seeing in our labor costs. In Q4 is reflective of a full portfolio of being open.
I would say generally as we're better staffed now than we were in Q2 and Q threes are labor has come up.
We're still understaffed relative to historical perspectives.
And not at our target levels for this year, our 2021 outlook. However reflects full staffing of our portfolio. So that's really important.
To know is that replace full staffing. It does also reflect sort of what I'd call sort of right level of staffing for the technology that we've introduced last year and centralized decisioning for the payments. We're now taking 70 plus percent of our payments outside of store and so we've really made it easier to run an aaron's store and Thats all reflected in our.
And our staffing outlook for 2021.
Great. Thank you that's really helpful.
And your final question for today will come from John Rowan from Janney. Your line is open.
Good morning, guys good.
Morning.
Doug I think you said earlier.
That there'll be tax liabilities. This year for the consumers that they are not expecting or haven't been there in the past just wondering if you could be specific as to what.
You're referencing.
Yes, we were I think Kelly referred to that we were referencing as we look out to the end of the first quarter beginning of the second quarter, our customers will be receiving tax checks as they usually do.
So from what we can tell those tax checks maybe the size of those checks may be pressured by withholdings for unemployment taxes that were not withheld or chose not to be withheld.
By the consumer during the year and so we may have pressure on those checks that could put pressure on overall tax season, yes, so jon unemployment benefit right our taxable so.
The extent that that's not addressed in any legislation that may come forward Alright, then.
It would create a tax liability for our customers that they're not accustomed to seeing given the unprecedented level of unemployment benefit they received last year.
Okay, well, yeah in some states.
Withhold those federal taxes in some states you have to opt in so.
If you have a big order consumers you don't opt in to pay those taxes. They will owe those taxes this year for last year.
And then are you guys seeing or did you see any weather interruptions and is that included in the guidance for one half earnings being stronger than two half earnings.
Yes of course, we like everyone else experienced the weather issues over the last few weeks, we add stores in Texas and in the middle part of the country shut down for a period of time. The good news about our business is we have a recurring revenue model that allows us to withstand the shocks to the system as we did last year with COVID-19.
And so we've got a portfolio that keeps on rolling our customers have returned to us once the weather cleared up and we've seen a rebound there but all of that has been reflected in this guidance for 2021.
Okay, and then just lastly, I think Kelly you said 50 store closure for 2021 is a good guide.
That kind of a good cadence to get us down to the apps.
Direct store number through the 2025 guide or is there going to be a deviation from that run rate post 2021. Thank you.
Yes, so theres Douglas the way, we think about that is we're going to continue to be optimizing and repositioning our portfolio over the course of the year, we have a number of opportunities I mentioned cloud.
Collapsed, two or three stores into one store in certain markets with our new Gen. Next concept and we'll be doing that I believe what we guided to on the road show was about a 20% to 30% reduction in our portfolio over the next five years, which equates to roughly 300 stores. So that's what put us on track for that I think in any given year, we may access.
<unk> or decelerate based on real estate opportunities, but that would be tracking to that ultimate goal.
Alright, thank you.
Alright, Thanks John.
This brings to the end of our Q&A session today.
Turn the call back over to Douglas Lindsay for closing remarks.
Yes, I just want to thank everybody for joining us today. So in conclusion I just want to say, we're really confident at Aaron's about our competitive advantage in the growing and evolving direct to consumer rent to own market.
We believe that our strategy is supported by our unique assets, which will deliver expanding margins, earning growth and strong free cash flow to our investors.
Our customers come to us because of our name brand products, our value proposition and our competitive pricing of high approval rates and best in class service and we believe we've positioned ourselves to win in the marketplace I couldnt be more excited about where we are right now and the prospect for Aaron's and I believe we've got the right strategy and the right team to create a R.
Rewarding future for our team members, our customers and our shareholders. Thank you for joining us today, and we look forward to catching up with you next quarter.
Thank you everyone for joining US today. This concludes today's conference call you may now disconnect.
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