Q1 2021 Aaron's Company Inc Earnings Call
Okay.
Thank you for standing by and welcome to the Aaron's Company first quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and instructions will be provided at that time.
I would now like to hand, the conference over to Michael Dickerson, Vice President of corporate Communications and Investor Relations for Aaron's Mr. Dickerson. Please go ahead.
Thank you and good morning, everyone welcome to the Aaron's Company first quarter 2021 earnings conference call joining.
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.
After our prepared remarks, we will open the call for questions.
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.
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 results to differ materially from our forward looking 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 with that I'll now turn the call over to our CEO Douglas Lindsay.
Thanks, Mike and thank you for joining us today.
I'm very pleased with the strong start to 2021 and the positive momentum in revenue and margins we delivered in the first quarter demonstrating the strong operating leverage in our business.
Consolidated revenues increased 11, 1% year over year in our first full quarter as a standalone public company.
The revenue increase included same store revenue growth of 14, 8% and we reported adjusted EBITDA margin that improved to 15, 4% of revenues.
This is the first quarter in over a decade. The company has delivered double digit same store revenue growth.
Our teams in the field and our store support centers and at Woodhaven are performing at a very high level and are energized and engaged as.
As I visit Aaron's stores around the country to support our operations team I am seeing a strong sense of pride and optimism about our brand and our competitive position our team members and customers are embracing the innovation that we're delivering and the dynamic lease to own market.
Over the last five years, we've significantly transformed the company with the goal of continuing to provide an exceptional customer and team member experience.
While also driving greater efficiencies in our operating model.
I'm proud to say that as of today, we have a centralized decisioning platform that provides greater control and predictability, resulting in a higher quality lease portfolio.
We have enhanced digital payment platforms that are enabling over 75% of monthly customer payments to be made outside of our stores.
We have an industry, leading fully transactional e-commerce platform, but it is attracting a new and younger customer.
And we have a portfolio of 51 Gen. Next doors that is currently outperforming our expectations with many more store openings in the pipeline.
All of these initiatives are underpinned by the investments that we've made and enhanced analytics and when combined with our more efficient operations are enabling us to deliver strong revenue and earnings growth.
These transformations to our business model are contributing to our outstanding performance in the first quarter of 2021, we are encouraged by the continuing improvement in the quality and size of our same store lease portfolio.
Which ended the quarter up six 2% compared to the end of the first quarter of 2020.
This improvement was primarily driven by strong demand for our products fewer lease merchandise returns and lower inventory write offs.
In addition, our customer continues to benefit from the ongoing government stimulus.
One of the most meaningful contributors to our strong portfolio performance with centralized decisioning, which we implemented across all company operated stores in the U S. In the spring of 2020 today nearly 70% of our portfolio is made up of lease agreements that were originated using this technology.
Centralized decisioning delivers consistency and predictability and the performance of our lease portfolio.
And enables store managers the flexibility to focus their time on growth oriented activities, such as sales and lease servicing.
We believe our algorithms to provide better outcomes for both the customer and Aaron's with a goal of having a greater number of customers achieve ownership, while at the same time, reducing our cost to serve.
We continue to refine this decisioning across our various channels and we expect this will continue to drive greater productivity from our lease portfolio.
Another contributor to our strong performance in the quarter was our ecommerce channel, which represented more than 14% of lease revenues.
Our ecommerce team has really delivered driving traffic growth to Aaron's dotcom by 12, 8% and increasing revenues by 42% in the first quarter as compared to the prior year quarter.
E Commerce lease originations increased as compared to the year ago quarter. Despite the significant shift of customer activity through our online platform in March of 2020 as stores closed during the early days of the COVID-19 pandemic.
In addition, e-commerce write offs improved by more than 50% compared to last year's quarter, primarily as a result of ongoing decisioning optimization operational enhancements and strong customer payment activity.
Our ecommerce team continues to deliver ongoing improvements to our online customer acquisition conversion and servicing capabilities, which is leading to margin growth and continued positive momentum in this important channel.
Our ecommerce growth in the quarter is enabled by our stores, which are not just showrooms in service centers, but are also last mile logistic hubs delivering an expanded assortment of products with same or next day delivery.
Finally, our real estate repositioning and reinvestment strategy is gaining momentum and we expect it will drive future growth.
Our new Gen next doors have larger and more modern showrooms.
Banded product assortment and improve brand imaging and digital technologies.
To date, we have opened 51, new Gen next doors and have generated results that are meeting or exceeding our targeted internal rate of return.
Equally as encouraging monthly lease originations in these stores grew much more rapidly than our average legacy store in the first quarter.
Our plan for 2021 is to open more than 60, new Gen next doors with the majority planned to open in the second and third quarters. While we're excited about both the early financial results and the infrastructure. We're building to accelerate our progress we continue to maintain a disciplined approach around our execution of this strategy.
Before I turn the call over to Kelly, Let me reiterate how pleased I am with the strong performance of our teams and the results. We have delivered in the first quarter of this year.
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 Kelly wall to discuss our financial results.
Thank you Douglas.
For the first quarter of 2021 revenues were $481 1 million compared.
Compared to $432 8 million for the first quarter of 2020, an increase of 11, 1%.
The increase in revenues was primarily due to the improving quality and increased size of our lease portfolio and.
Strong customer payment activity during the quarter aided in part by government stimulus and partially offset by the net reduction of 166 company operated and franchise stores compared to the prior year.
As Douglas called out earlier E Commerce revenues were up 42% compared to the first quarter of the prior year and represented 14, 2% of overall lease revenues compared to 11, 3% in 2020.
On a same store revenue basis revenues increased 14, 8% in the first quarter compared to the prior year quarter.
First double digit same store revenue growth since 2009, and our fourth consecutive positive quarter.
Same store revenue growth was primarily driven by a larger same store lease portfolio and strong customer payment activity.
Including retail sales and early purchase option exercises.
We believe this growth is partially a result of the government stimulus programs passed in 2020 and 2021.
Additionally, the company ended the first quarter of 2021 with our lease portfolio size for all company operated stores of $128 $8 million, an increase of three 6% compared to the lease portfolio size as of March 31 2020.
Lease portfolio size represents the next month's total collectible lease payments from our aggregate outstanding customer lease agreements.
Please see our form 10-Q filed this morning for additional detail.
Operating expenses, excluding restructuring expenses spin related transaction cost and the impairment of goodwill and other expenses, which were both recorded in the first quarter of 2020.
We're down $1 $5 million as compared to the first quarter of last year.
This decrease was primarily due to a reduction in write offs store closures and the impact of the COVID-19 related reserves recorded in 2020.
Partially offset by higher personnel costs related to variable performance compensation.
Higher marketing expenses, and an increase in bank and credit card related fees.
Adjusted EBITDA was $73 $9 million for the first quarter of 2021.
Compared with $34 7 million for the same period in 2020, an increase of $39 $2 million or 112, 9%.
As a percentage of total revenues adjusted EBITDA was 15, 4% in the first quarter of 2021 compared with 8% for the same period last year, an improvement of 740 basis points. The improvement in adjusted EBITDA margin was primarily due to the item.
That drove the total revenues increase and a 310 basis point reduction in overall write offs to three 1% of lease revenues, including both improvement in the e-commerce and store origination channels compared to the prior year.
The improvement in write offs was due primarily to the implementation of new Decisioning technology improved operations the benefit of government stimulus and the impact of COVID-19 related lease merchandise reserves recorded in the first quarter of 2020 and not repeated in 2021.
On a non-GAAP basis diluted earnings per share were $1 24 in the first quarter of 2021 compared to non-GAAP diluted earnings per share of <unk> 30 for the same quarter in 2020, an increase of 94 cents or 313, 3%.
Cash generated from operating activities was $22 million for the first quarter of 2021, a decline of $36 6 million compared to the first quarter of 2020, primarily due to higher inventory purchases, partially offset by higher customer payments and other.
Changes in working capital.
During the quarter. The company purchased 252200 shares of Aaron's common stock for a total purchase price of approximately $6 $3 million.
As of the end of the quarter, we had approximately $143 $7 million remaining under the company's share repurchase authorization that was approved by our board on March 3rd of this year.
The company's board of Directors also declared our first quarterly cash dividend of <unk> 10 per share last month, and we paid the dividend on April 6th.
As of March 31, 2021, the company had a cash balance of $61 $1 million.
Less than $500000 of debt.
And total available liquidity of $295 $5 million.
Turning to our outlook.
Based on our performance in the first quarter of 2021 and the passage of the American Rescue Plan Act in March we have revised our full year 2021 outlook for the full year, we expect consolidated revenues of between $1 75 billion and $1 77.
$5 billion representing.
An increase in our revenue outlook of $75 billion.
We also expect adjusted EBITDA of between $190 and $205 million.
Representing an increase in our adjusted EBITDA outlook of $35 million.
For the full year of 2021, our outlook for the effective tax rate depreciation and amortization and diluted weighted average share count are unchanged. We have also increased our full year same store revenue outlook from a range of zero to 2% to a range of four to six.
Percent.
Similar to our original outlook total revenue and adjusted EBITDA in the first half of 2021 are expected to be higher than the second half of 2021.
This outlook assumes no impact from the expansion and acceleration of the child tax credit payments expected to begin in July 2021.
Additionally, our updated outlook assumes no significant deterioration in the current retail environment or in the state of the U S economy as compared to its current condition and a continued improvement in global supply chain conditions.
With that I will now turn the call over to the operator, who will assist with your questions.
At this time, if you'd like to ask a question. Please press star one on your telephone keypad, Anthony <unk> with loop capital markets. Your line is open.
Good morning, Thanks for taking my question and Wow, just Wow I mean, great results congrats on that.
Thank you.
Question.
First question you mentioned Kelly just the variances you mentioned some supply chain.
Wonder if you could give us an update I know supply chain.
Headwind.
Late last year.
I was wondering.
What youre seeing in terms of supply chain now conditions.
Maybe.
Yes.
Drivers thanks.
Hey, Anthony it's Douglas Thanks for the question Yeah, I, just want to say I'm really proud of the team we got a lot of momentum and energy in the business right now and both channels are really performing well I think in terms of the supply chain, we're seeing continual improvement there and our inventory levels and we definitely have sufficient inventory to run the business right now I'm going to kick it to Steve Olsen just to.
Give you a little bit more detail on what's happened in the last quarter and our outlook for supply chain. Yes. Thanks, Doug Good morning, Anthony Yes, Doug said, we're seeing continued improvement.
And that continued throughout Q1 and absolutely supported the high level of demand that we saw across categories.
As we look through the balance of the year. We believe we're going to see continued improvement from Q2 to Q3, and it's really now just about fine tuning that inventory across categories and across price points just to get to that exact level. We're looking for.
Got it and then just one.
Follow up.
Maintenance too granular, but you might.
And.
When you provide your guidance before you're expecting about a <unk>.
4% to 5% write off rate in 2021 given.
Reduction in write off rate and given the improvements that you talked about with centralized decisioning and given stimulus I was just wondering if you could.
That guidance has changed at all thank you.
Yeah, Hey, Anthony it's Kelly.
That that guidance still hold for the rest of the year I mean, as a reminder, right as we go through Q3 and certainly into Q4.
Absent the impact of the changes to the child tax credits in the stimulus is going to start to wane and so we kind of model of our business to be in that 4% to 5% write off range.
Sure.
Fine tuning the optimization of our lease Decisioning and so we'd expect to continue to see that flow through into the P&L.
Got it thanks, again and keep up the good work guys.
Thank you.
Kyle Joseph with Jefferies. Your line is open.
Hey, good morning, guys. Congratulations on a really really strong start to the year.
I just wanted to dig into the the impact on it as stimulus on the quarter and I don't know if you can give us kind of that.
The trajectory of the comp between January February and March and even into April just based on one week's stim.
Just wanted to get a sense for consumer behavior.
Buyout activity versus new leases, if you could walk us through that.
Sure I'll start.
It's Douglas.
From what we're seeing with the customer they are more liquid than we've really ever seen we recognize its difficult time, where there is higher unemployment right now but our.
Our customers are receiving checks and getting stimulus payments and despite the unemployment challenges.
They are making more payments than.
We've seen it a while more online payments more customers achieving ownership and there is really strong demand for our products and you saw that come through in our comp store sales up 14, 8% I would say is we sort of chunk that.
Same store sales number I would say about a third of that performance is relative to the larger lease portfolio size and that's in part due to lower churn out of our portfolio because of the liquidity in the marketplace, but also because of our centralized decisioning.
So that's a.
A third of that and as I mentioned on the call our same store and lease portfolio was up about 6% in the quarter, which at the end of the quarter, which is a good number about another third of our same store comp in this quarter was related to just strong customer payment activity.
Renewal rates of our customers and our lease portfolio were much higher and we saw that really spike when the checks came out in March and so that was super helpful. And then about a third of our performance in our comp stores of $14 eight was related to higher retail sales and higher early payouts.
And we've seen in previous years, and so that's kind of the way we're looking at it and so how much stimulus contributes to each of those pieces. We definitely know the retail sales in Epo was helped by stimulus and it's hard to disaggregate on the payment side and on the lease portfolio side the contribution.
Stimulus relative to all the other things we're doing in the business to streamline payments and a decision our customer to have a healthier portfolio. We know those are influencing.
The business and we're really pleased with where the business is today in terms of outlook I'm going to let Kelly really speak to as we look at that those comps going forward, yes, Kyle. So obviously, we posted a very strong first quarter and then we're guiding to between 4% and 6% for the year.
We see that play out in Qs, two and three and four first want to remind you that for Q3 and Q4, we're copying over nice increases last year right seven 3% up in Q3 of last year of three 4% in Q4.
So what youre going to see us.
Q2 will be strong.
And in Q3, and Q4 will be less than two two.
Is that kind of slows through the course of the year, given what we're comping over but again in total.
Up four 6% for the year is something we're very excited about.
And one thing I also want to mention about the health of the portfolio since we've rolled out centralized decisioning, we have more levers than ever to control our performance and really optimize the performance of our portfolio.
The churn or the reduction in our product returns and write offs. So we saw this quarter is nothing new we've been experiencing that since we rolled out centralized decisioning in April last year, and so when you combine sort of our ability to move the levers up and down and control the health of the portfolio with a strong demand we're seeing.
We are optimistic about what we've done in the business and our ability to to drive portfolio performance in the future.
Got it very helpful. One follow up from me, obviously, you guys have.
Two quarters now.
As an independent company going back to that longer term kind of five year plan you guys laid out in November given the really strong two quarters out of the gate can you talk about kind of your confidence in executing on that longer term plan.
Yes College, Kelly I'd say that we're as confident as we've been at any point since the decision was made to split the two businesses last year, just the performance across the business. Obviously Q1 speaks for itself, but what youre not seeing behind the scenes is.
Continuing to fine tune, our model right and.
So the investments, we're making around on the marketing side the investments, we're making around our real estate strategy. The investments, we're making in technology or people that we brought onboard.
It was mentioned in his prepared remarks, everyone is super excited about where we're at and where we're headed so yes, I'd say, we feel really good about about that five year plan.
Got it congrats again on a good quarter and thanks for answering my questions.
Thank you Karl Thanks Karl.
As in Russia with the Ehrenberg your line is open.
First one is about your addressable market in many cases, we've seen consumer balance sheets that are stronger today than pre pandemic. However have you seen anything that implied customer credit quality has improved through all the government stimulus.
Yes. This is Douglas.
It's tough to say, we've got we have customers that are graduating well first of all we believe our market size is roughly the same.
We know in recessionary times, our market expands we are actually very unique times right now because of the stimulus that's in place what were seeing with our customers our customer.
It has more liquidity than they've had in the past and with that liquidity.
They're not necessarily going out and buying more things for cash they are still using our product offering which is the lease to get into low monthly payments and they are paying there.
There are monthly obligations at a more regular rate. So thats, one general thing about the customer in terms of credit.
Our approving more customers that are coming into our portfolio and seeing a higher quality customer in our portfolio and we believe that's happening for two reasons one they just the liquidity out there is making our customer have better credit quality.
And two that we have customers coming into our space are falling down into our space from credit tightening up above so.
We're seeing a definite demand in this space more so than we saw in the past year or two.
Okay, Great and second the strength in E. Comm really stood out to me given the amount of online competition can you remind us higher customer acquisition and retention strategies differ between e-commerce and in store.
Sure Hey, Alex This is Steve Olsen.
Now the key differences on our.
The strategy really starts with our digital marketing efforts. So we are continuing to invest in direct more of our marketing dollars to these digital marketing efforts and really about targeting the right audience and then engaging them with the relevant content and messaging and then from there it's about giving them a great user experience on our website.
We continue to expand our assortment that we offer in our website, we continue to give more visibility to our inventory both in RF season, our stores and then give them the right functionality to navigate in that call. It the third piece and Douglas talk about I'll, just mentioned that E. Commerce Decisioning engine that has been the backbone of our e-commerce platform for over five years.
It really helps us to make the right decisions with our customer.
Yes, so the last thing I'd say on that is we feel like we have a real competitive advantage in the E. Com. If you think about our embedded infrastructure stores our stores are not just.
Our retail showrooms their service centers and their last mile logistics hubs, so as we expand our product assortment.
And find better ways more efficient ways to convert the customer online, it's a high margin business and we're trialing, a new and younger customer and in many cases, we're getting more and more products online that we can deliver same day or next day. So that's super encouraging and I'm really proud of the progress. The team has made not just in customer acquisition, but in conversion.
In delivery and that's an exciting channel for us.
Alright Thats helpful. Thank you all.
Thank you. Thank you.
Jason Haas with Bank of America your like.
Your line is open.
Great. Thanks for taking my questions.
I wanted to dig into the guidance change a little bit. So you had a really strong <unk>. So I'm curious to know how much of that raise in guidance was due to.
Beating expectations are beating our plan in <unk> versus whether anything changed with your outlook for <unk> and <unk>.
Yes, great question, Jason as Kelly.
<unk>.
Certainly a large part of that raise is the beat that we had in Q1.
But.
Piggyback on some of the things that level since ive been talking about right. We continue to see great performance in terms of our customers, making customers, making payments as well as us driving demand and new agreements so with the larger portfolio size.
The higher kind of customer payment activity and the resulting lower write off.
We felt it was prudent to kind of take out that that outlook not just for the Q1 beat but also for the performance that we expect to see through the remainder of the year.
Got it that's really helpful and then as a follow up a little bit more longer term I'm curious just given the recent strength if that causes you to change.
You're on your plans for reducing the store base.
Like maybe it makes sense to us to keep some of the more stores open just given the strong performance and then I think theres been some questions at least that I've received just about any potential to accelerate that pace of closures. So I'm curious if anything has changed with regards to that long term plan.
Hey, Jason Nothings really changed I mean, we continue to assess it but our strategy is the same our objective is to have fewer more profitable stores in the same markets that we're serving today.
Having a bigger storefront presence. It's also a logistics hub in the servicing but also having a growing e-commerce presence and thats not about.
Sort of shrinking to grow it's effectively being optimizing our markets and being more efficient in our market is lowering our cost to serve is still servicing those markets.
We're super excited about that strategy and as you see during the quarter.
Open to date 51 stores and that's a combination of renovations in place repositioning and these two to one or three to one merged strategies, which in the case of those mergers. We think we're just creating a more efficient.
Store footprint for the markets, we're serving in terms of moving faster.
Do you want to call out, which I've done in the past so we've intentionally shortened lease term.
Over the past few years to be able to pivot our portfolio and we're really optimally positioned to do that and we're really making great progress there.
We have scaled our operations teams and our real estate teams to move faster and we have implementation teams on the ground actually real time implementing these store Rollouts. However, we're really trying to take a disciplined approach to our site selection given the long term commitments. These leases, which are let's call. It five.
Seven years.
So we may do 100 stores next year, which is approximately 10% of our portfolio, which would effectively be kind of where we are.
At the end of this year as well and again this will be a combination of renovate and play some relocations, but it's of course always as with real estate subject to market conditions, permitting landlord negotiations and construction timelines, which limit us, but our efforts will be if this continues to work, which we believe it is and we'll to try to ask.
Celebrate our progress as much as possible in a disciplined way.
Great. That's really helpful color. Thank you.
Thank you.
Tim <unk> with Northcoast Research your line is open.
Thank you.
I guess just a one quick maybe.
Maybe higher level question.
To centered around your central this is in our commentary.
Based on maybe my understanding your team over here.
Commerce.
Write offs versus in store typically been much higher.
Historically and I was wondering.
<unk> environment outside of all this noise from stimulus do you guys think that e-commerce, even write offs can be in line with with brick and mortar you write offs longer term or the economy.
You continue to be a little bit more risky.
Good morning.
Yes, I'm really proud of what the teams accomplished where their.
E Commerce business and optimizing Decisioning there we've made several.
Changes to our Decisioning over the past few years as you may know our E comm decisioning centralized decisioning as sort of a more established we've had it out there for five plus years and really seeing the benefits of that we don't approve as many customers in E com, but we're getting smarter about our approvals our loss rates there have come down.
Considerably they improved year over year about 50% and they continue to improve the delta is now much lower than it used to be between in store and E comm write offs.
And.
But I don't think however that they will ever sort of match each other and there's a couple of reasons on E. Com, we have a much higher occurrence of new customers as we go and attract new customer and new customer naturally has a higher write off and on the E. Com, it's mainly new product, which if you think about our stores if it makes a pre leased and new products and pre lease.
Products are.
We're highly depreciated in have a lower book value and so when youre, writing off an asset or a piece of inventory on the E. Com. It tends to have a higher book value per SKU. So.
A combination of new customers and new product always naturally will have a higher loss rate, but we're really really pleased with the way we're performing there.
Thank you that's all for me.
Thank you.
Brad Thomas with Keybanc Your line is open.
Hi, Thanks, Good morning, let me add my congrats as well on a great start to the year here.
I just wanted to follow up on that loan.
Sure sure well deserved.
I just want to follow up on that last question about about the write off you are.
Obviously doing some really compelling things like around the central Decisioning and so I guess as you kind of.
Hum.
Piece apart. This unusual time, we're in where customers are behaving in a much more favorable manner.
Some of the changes you're making how do you see it all shaping out as the world hopefully starts to go back to normal.
In the year to a head here, where do you target the write offs you know longer term.
Yes, Brad Great question, and I appreciate you're kind of calling that out I'd be remiss. If we didn't also.
To just that.
The great performance of our teams in the field.
Decentralize decision into one part of it an important part.
The day to day activity that goes on across our teams.
To work with our customers to ensure that they are in a position to make those payments and to collect on his monthly payments.
Making a big difference as well.
We're running a much more balanced business today than I've seen since I've been here for sure and that's helping.
As it relates to kind of the longer term view here.
It's very hard for us to kind of parse through the data and understand exactly.
How much of this improvement is attributed to the government stimulus.
But we do know just in looking at our modeling and our and going off our expectations coming into the cycle with our centralized decisioning.
That piece of the business is performing well and we'd expect that to continue just a little bit of insight right. As we think about the back half of this year and certainly as we start to put our thoughts around the following year. Our expectation is that the business will continue to perform at levels North of what we saw in call. It that 2017 18.
19 fiscal periods.
And that kind of underlines our confidence that it is much what we're doing on our end to drive this business forward.
It is the increased liquidity assistance provided by the government. So hopefully that helps a little bit is what we're thinking about longer term and just to bring it back I think we've mentioned before our target is 4% to 5% write offs that unchanged as we sit here today that may change going forward as we continue to improve and get even better around.
Managing the portfolio centrally but right now that's what we're what we're managing the business towards yes, Bryan and I can't emphasize when we talk about our portfolio being up 6% year over year, how big an influence the lower returns and lower write offs are to the size of the portfolio is not just a P&L metric, where we look at net book.
Divided by revenue reduction in our churn, which is a reduction in returns of write offs increases the value of our lease portfolio, which is our recurring revenue portfolio, we'd benefit from that in future periods.
Absolutely Thats really encouraging to hear I wanted to follow up on the new store concept as well Douglas you gave some comments on it and it sounds like you had some encouraging results could you just talk a little bit more about how you how you parse out how those stores are doing versus sort of other factors.
And you talked about I think overall store strategy, but but can you talk more about the potential to accelerate their openings.
Sure Yeah. So I mean, I think I mentioned, we have 51 stores to date, we've been keenly watching their performance as you might imagine and we measure them on two factors one is against the pro forma and we've got pro forma expectations that.
In terms of buyback and IRR and as I said the stores are exceeding our pro forma but we also look at them.
Versus the control group and.
Early in the in the sort of rollout of these stores were really looking at the demand curves and kind of how are we driving new originations in these stores and what we're seeing on the demand side is.
Delivery lift that's about 19% greater than our legacy stores in the first 12 months. So that's very encouraging.
And we're tracking to our pro forma we're tracking to our targets for capital deployed is in our payback periods and so we're really encouraged by that we will continue to monitor it as we are.
More stores the way, we think about these things in the future is it's not a one size fits all we have are a suburban strategy. We've got a rural strategy. We have concepts of work in each of those markets. Some of our stores will be larger stores with static showrooms and about I'd say, 60% of those that we built to date are like that in about four.
80% will be in smaller markets, we have smaller showrooms will still introduced the technology and the footprint.
In the modern brand image that.
We wanted to display in those stores. So we're super excited about that we've invested heavily in analytics to drive our strategy.
We've built a real estate analytics team that where we believe we know where our customer is and how to position those stores and markets. We believe we can serve our 700 markets with fewer stores as we've said before and do that efficiently, while freeing up working capital and driving earnings growth and free cash flow. So we're very bullish on that initiative in <unk>.
So far everything's working according to plan.
That's very helpful. Thanks, so much.
Thanks, Brett.
Again, if you'd like to ask a question. Please press star one Bobby Griffin with Raymond James Your line is open.
Thank you and good morning, everybody congrats on a good quarter.
Are you taking any products.
I guess the first thing I wanted to dive into is more just kind of the changing business model here E. Commerce continues to mix up very impressive results as youre seeing that happen are you able to find and notice incremental labor savings opportunities in the store infrastructure given that you know a bigger and bigger portion of your business is coming from online.
Hey, Bobby its Douglas.
I would say generally, yes, but I wouldn't I wouldn't point directly to E. Com E coms, increasing volumes in our store, which is great. Our average customer per store continues to grow and so we need labor to serve those customers as you know E com as an acquisition channel.
What enables our E. Com platform is our built in infrastructure of stores and so to the extent, we are driving greater volumes, we need more servicing.
That being said, however, we're getting leverage on that labor and the technology that we're putting in place.
Freeing up our people to do more value added things in the stores such as cell at selling and renewing leases.
We have definitely seen lower staffing levels this quarter coming out of the pandemic than we have in the past and I attribute that not only to sort of efficiencies in E comm, but efficiencies in our payment platforms and efficiencies in our centralized decisioning centralized decisioning alone took a transaction that used to take 30% to 45.
Minutes and turned it into a transaction that takes eight to 10 minutes to do and so we're freeing up capacity.
Capacity for our people to do other things, which is great and not needing.
As much labor in the stores that being said the business continues to grow and so we will prudently scale labor as it grows over time.
Okay, that's very helpful and I guess.
Secondly for me when you look at Great <unk> Big EBITDA beat maybe $30 million versus the street, increasing the guide as well I think by $35 million. So.
Most of the guide increase came from the <unk> numbers at least versus our street model, which could have been off versus how you guys looked at it but is that just a sign that you think most of the stimulus impact will be contained in <unk> to the favorable impact from the 1400 dollar checks and things like that will be mostly <unk> 21 benefit or is there just some conservatism built in there too.
Because we don't exactly know how the stimulus would play out in the second quarter anything around how you guys framed up stimulus carrying forward inside that guidance raise would be helpful.
Yeah, Hey, Bobby it's Kelly little bit of color. There. So I think you hit on a key point right that $30 million beat your references versus consensus that's not.
<unk> versus our internal plan. So as you know we provided annual guidance, we don't provide quarterly numbers.
What I will tell you is that from in terms of stimulus impact on our customer and then how that impacts us as a company. We believe that the upfront checks that they received in December.
And then also working on all of our tax they've received recently that is kind of largely in Q1 and it shows up some degree the very beginning of Q2.
There is a continued benefit associated with enhanced unemployment. That's been provided obviously unemployment rates are coming down which is good for us, but those customers of ours that rely on the unemployment checks.
We expect them to continue to see elevated levels through August when those checks run out from at least on the government side or the federal government side of the ledger. So long story short Q2, Q3 continue to benefit at some level from from this enhanced stimulus that we've been seen.
Again, we called it out in our prepared remarks, but what we haven't factored in yet.
<unk>.
Impact from the change in the child tax credits.
We do know based upon what the government has said and what the IRS has said is that our customer will start receiving some form of.
Refund in July.
What we don't know yet exactly how that's going to be used it could in effect. The second tax season right in the course of our fiscal year or something our industry has never seen before so if you want to think about an area, where we're being conservative maybe that right. Because we just don't know yet enough to be able to factor that in with any.
Any specificity to inform our guidance to you all.
Okay. So I mean, the only thing I would add the only thing I would add to that as well.
When large checks come out like the $1400 checks there tends to be different behavior in terms of payouts and other things and then smaller checks over time, and so we'll wait and see what that looks like in the latter part of the year.
Okay. I appreciate that that's very helpful. I guess two quick follow ups one on the COVID-19 related reserves that were booked in 2020, Kelly would you guys already released those or will you release those back to more normal levels at some point.
So the ones that are specific to <unk>.
Write offs of lease merchandise.
We've not released them completely right I think just as the way the way our reserve calculations work as we've continued to see very strong customer payment activity and as a result, low write off activity.
That percentage is naturally kind of coming down in terms of the percentage of the portfolio that are going against.
So.
It's to be seen how thats going to play out through the course of this year and certainly into next year as we do expect at some point, we'll return back in some to some more normal level of activity by our customer, but the answer your question specifically, we haven't released any material portion of that of that item just a small piece. Okay. Okay. That's helpful and I guess are lacking for.
Me was you Kelly on the balance sheet.
How do you you guys, great cash balance no debt basically I mean, when you think about using funds for buyback and different things like are you managing it for our target liquidity or how are you. How are you considering like do you want to keep 300 million of liquidity dry powder or anything like that just to help us think about.
How you frame up looking at the balance sheet for buyback and different activities.
Yes, great question.
As we think about our balance sheet right now and specifically the liquidity.
The one thing we want to make sure of is that we have.
As the.
Supply chain continues to normalize right, which we're just going to use cash in the short term as that happens right.
As we continue our real estate repositioning strategy as well as the investments, we're making on the technology side.
We want to make sure we have adequate capital to fund those strategies, which had $300 million liquidity. We believe we do and then Douglas mentioned wanting to accelerate as best we can the execution of those strategies, we kind of run scenarios that say, if we're able to do that without taking risk around site selection or things like that.
To make sure we have capital to fund the business.
Outside of that it's just continuing to be opportunistic as to where we should see the share price and then just time right.
You look at Q1, our board approved the $150 million share repurchase authorization at the beginning of March. So we had about three weeks in the quarter to execute on.
I'm, sorry that that plan.
So if you start to think about what that might look like other short course of the year I hope that havent informs some of the thinking there, but we're not we're not targeting anything specifically to inform that are kind of taking it on a quarter by quarter basis again with a view towards how we see that liquidity is going to be needed in the upcoming quarters.
Absolutely that's very helpful. I appreciate all the details and how best of luck here in Q2, and the rest of the year.
Great. Thanks, Bobby.
Thanks, Bobby there are no further questions at this time I would now like to turn the call back over to CEO Douglas Lindsay for parting remarks.
Thank you. Thank you all for joining us today really appreciate it we really appreciate your interest in Aaron's and as you can tell we're very excited about the momentum and the strategy for future growth in our business.
Thank you for your support and we look forward to talking to you again next quarter have a great day.
This concludes the Aaron's company first quarter 2021 earnings Conference call. We thank you for your participation you may now disconnect.