Q2 2021 Aaron's Company Inc Earnings Call

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Good morning, My name is in China, and that'll be our conference coordinator at this time I would like to welcome everyone to the Aaron's.

Company second quarter 2021 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'll 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 second quarter 2021 earnings Conference call.

Joining me this morning are Douglas Lindsay <unk>, Chief Executive Officer.

Steve Walsh, Aaron's, President and Kelly wall, various chief Financial Officer.

After our prepared remarks, we will open the call.

2 questions.

Many of you have already seen a copy of our earnings release issued this morning.

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 2000.

'twenty 1.

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 contents of our forward looking statements.

Also please see our form.

10-K for the year ended December 31, 2020, another 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 will now turn the call over to our CEO.

Douglas Lindsay.

Thanks, Mike and thank you for joining us today once again I'm pleased to report another quarter of strong operating performance and continued positive momentum at the Aaron's company.

In the second quarter, we exceeded our expectations for total revenues same store revenues and adjusted EBITDA.

Also returned significant capital to our shareholders.

Total revenues increased 8.5% year over year, and our second full quarter as a standalone public company, primarily due to strong underlying business trends and the execution of our strategic priorities.

Same store revenues grew 11, 2%.

In the second quarter of 2021 compared to the prior year.

Fifth sequential quarter of positive growth and the eighth positive quarter over the last 10 quarters.

The improvement was roughly 2 thirds driven by a larger lease portfolio size in or in the second quarter and the remaining 1 third is primarily due to better customer.

Payment activity than the prior year.

Strong demand for our products combined with a favorable impact of centralized decisioning and continued but moderating government stimulus to our customers.

Led to an 8.7% increase in our quarter ending same store leased portfolio size compare.

Prior year.

Our overall lease portfolio continues to perform well.

As of the end of the second quarter, approximately 80% of our total lease portfolio is comprised of lease agreements that were originated through our centralized decisioning platforms.

This decisioning technology allows.

How's us to better match, the customer's lease payment with their financial position with a goal of helping our customers achieve ownership.

We believe the continued optimization of our Decisioning technology combined with improved operations is a significant contributor to our strong lease portfolio.

Performance.

Resulting in fewer lease merchandise returns and lower write offs in both our store and e-commerce channels.

Our ecommerce channel continues to grow at a healthy pace, representing 14% of total lease revenues in the quarter.

The ongoing investments that we're making in our digital technologies such.

An enhanced online shopping experience.

Standard product assortment greater visibility into product available for express delivery and self service account management are driving growth in this important channel.

The growth in our portfolio of leases generated online is driving improvements to our overall margin performance.

Such as we leverage the fixed cost structure of our store and supply chain assets to serve the large lease to own market.

Moving from revenues to earnings the company delivered a strong 16, 3% adjusted EBITDA growth in the second quarter.

This resulted in an adjusted EBITDA margin improvement of 100.

Basis points from the prior year second quarter, and the fifth straight quarter of year over year adjusted EBITDA margin expansion.

Continued improvements in operating performance and strong execution by our team gives us the confidence to continue reinvesting in the business to support our multi year strategy of promoting the aaron's value.

<unk> proposition digitizing, the customer experience and aligning our store footprint to the customer opportunity.

1 of the key investments that I want to highlight is our Gen next real estate strategy that is accelerating.

With a growing store pipeline and performance is exceeding our expectations.

As of the end of June.

June we have 64, Jim makes stores and have generated results that are meeting or exceeding our targeted 25% internal rate of return and 5 year payback period.

At the end of the quarter there were several gen X locations nearing completion, and we expect to open an additional 8 stores by the end of July.

Equally as encouraging monthly lease originations and Jim next stores opened for less than 1 year grew at a rate of more than 20 percentage points higher than our average legacy store in the second quarter.

As we previously communicated we plan to open more than 60 <unk> stores in 2020.

Yeah.

While we're excited about both the early financial results and the infrastructure. We are 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 the company and the.

1 quarter.

Over the last several years, we have significantly transformed aaron's with a goal of continuing to provide an exceptional customer and team member experience, while also driving greater productivity in our operating model.

I remain confident that we have the right team strategy and marketing.

Market opportunity, which when combined with our financial strength will enable us to deliver long term growth for all of our stakeholders.

Now I'll turn the call over to Kelly to discuss our financial results.

Thank you Douglas for the second quarter of 2021 total revenues were 467.

A second $5 million.

Third to $441 million for the second quarter of 2020.

An increase of 8.5%.

This increase was primarily due to the improved quality and increased size of our lease portfolio and continued strong customer payment activity.

<unk> during the quarter.

The increase in total revenues was partially offset by the net reduction of 42 company operated stores and 71 franchise stores for the 15 month period ended June 32021.

On a same store basis revenue increased 11.

11, 2% in the second quarter compared to the second quarter in the prior year.

As Douglas mentioned this was our fifth consecutive positive quarter of same store revenue growth.

Leases originated in both our in store and e-commerce channels contributed to our revenue growth.

Which was primarily.

Merrily driven by a larger same store lease portfolio size and continued strong customer payment activity.

So most of the last 4 quarters, we believe that customer payment activity has been positively influenced by centralized decisioning and other operational improvements as.

As well as the positive.

Of government stimulus programs to our customers.

E Commerce revenues increased 15, 8% versus the second quarter of 2020.

<unk> represented 14% of overall lease revenues compared to 12, 8% in the second quarter of the prior year.

And we continue to believe that the strategies and initiatives. We are undertaking to optimize our e-commerce offering will allow us to achieve our long term growth goals in this important channel.

The company ended the second quarter of 2021 with our lease portfolio size for all company operated.

The stores of $132.8 million.

An increase of 7.6% compared to our lease portfolio size of $123.4 million on June 30 of last year.

As a reminder lease portfolio side.

Represents the next month's total collectible lease payments from our aggregate outstanding customer lease agreements.

And management believes this is 1 of the metrics that is important in understanding the drivers of lease revenue growth in any given period.

Operating expenses excluding.

Operator, and our restructuring expenses and spin related transaction costs were up $21 million in the quarter as compared to the second quarter of last year.

This increase is due to higher personnel costs and other operating expense offset by lower provision for lease merchandise write offs.

Personnel cost increased $3 million in the second quarter of 2021 as compared to the prior year, primarily due to higher labor hours and performance based compensation in our stores higher Standalone public company costs and Comping over the cost cutting measures we took in the second quarter.

Excluding 2020.

Partially offset by lower performance based bonus accruals this year.

The $13.3 million increase in other operating expenses in the quarter is primarily due to the launch of a new marketing campaign during the second quarter of 2021.

Lower vendor marketing contributions.

And a reduction in marketing initiatives during the second quarter of 2020 that resulted from cost cutting measures. The company implemented in response to the COVID-19 pandemic.

In addition, we had higher occupancy store maintenance and.

<unk> been in handling cost in the second quarter of 2021.

Primarily due to the temporary closure of our showrooms in the second quarter of 2020.

The provision for lease merchandise write offs as a percentage of lease revenues and fees decreased to 2.9% for the 3 months.

<unk> ended June 32021, compared to 3.7% for the comparable period in 2020.

The improvement in write offs was primarily due to the continued favorable impact of our in store and online Decisioning technologies <unk>.

<unk> operational.

<unk> execution.

And the benefit to our customers from government stimulus.

Adjusted EBITDA was $65.3 million for the.

Quarter of 2021.

Compared with $56.2 million for the same period in 2020 and.

An increase.

$1 million or 16, 3% as.

As a percentage of total revenues adjusted EBITDA was 14% in the second quarter of 2021 compared to 13% for the same period last year, an improvement of 100 basis points.

Yeah.

The increase.

<unk> <unk> and adjusted EBITDA margin was primarily due to the items that drove the total revenues increase and the 80 basis point reduction in overall write offs previously discussed.

On a non-GAAP basis diluted earnings per share were $1 <unk> in the second quarter of 2000.

'twenty, 1 compared to non-GAAP diluted earnings per share of 83.

The same quarter in 2020.

An increase of 22 or.

Our 26, 5%.

Cash generated from operating activities was $40 million for the second quarter of 2.

Increase in 'twenty 1.

Decline of $117.7 million compared to the second quarter of 2020.

This decline was primarily due to higher purchases of lease merchandise to meet increased customer demand and to return the company to more normalized inventory levels.

During the second quarter, the company repurchased approximately $1 million 166000 shares of Aaron's common stock for a total purchase price of approximately $38.6 million.

And through a <unk> 1 plan continue to repurchase shares into the first month of.

The current quarter.

For the full year to date period ended July 23, 2021, the company has repurchased 184 million shares for approximately $57.4 million.

As of July 20, <unk>, we had approximately $92.6.

$6 million remaining under the company's $150 million share repurchase program that was approved by our board in March of this year at end December 31 of 2023.

To wrap up the material capital allocation activities from the second quarter in May.

The company's board of directors declared a regular quarterly cash dividend of <unk> 10 per share which was paid on July 6.

As of June 32021, the company had a cash balance of $48 million zero debt and total available liquidity of 281.

$1 million, which includes $234 million available under our unsecured revolving credit facility.

Turning to our outlook, we have raised our full year revenue and earnings outlook for 2021 for.

For the full year, we have increased our outlook for total revenues.

<unk> to between $1.775 billion and $1.8 billion. We also increased our outlook for adjusted EBITDA to between $215 million and $225 million.

For the full year 2021, we increased.

<unk> our outlook for the effective tax rate modestly to 26% did not change depreciation and amortization and lowered the diluted weighted average share count for the full year 2021 to 34 million shares.

We have not assumed any additional share repurchases beyond what has been.

Been previously described.

We have also increased our full year same store revenue outlook from a range of 4% to 6% to a range of 6% to 8%.

We have increased our expected capital expenditure range by $10 million to.

To a range of 90 million to 100 million.

This increase is primarily the result of a higher number of Gen next stores added to the pipeline.

We upheld our free cash flow estimate for 2021 flat at $90 million to $100 million.

We expected adjusted EBITDA increase is offset by.

Higher Gen next pipeline investment and additional lease merchandise inventory purchases.

We believe that the benefit to our customer from government stimulus programs will moderate in the second half of 2021 at.

At the same time, the favorable impact of centralized lease decisioning.

Our digital servicing platforms and other operational enhancements are contributing to a sustainable improvement in customer payment and write off activity.

More specifically our outlook assumes customer lease payment activity remained elevated in the second half of 2021 when compared.

Pretty COVID-19, pandemic levels, but lower than the second half of 2020.

Additionally, we expect write offs will continue to be lower in the second half of 2021, when compared to the pre COVID-19 pandemic levels, but higher than the second half of 2000.

And finally, our updated outlook assumes no significant deterioration in the current retail environment state of the U S economy or global supply chain as compare to their current conditions.

With that I will now turn the call over to the operator, who will assist with your questions.

<unk>, ladies and gentlemen at this time, if you would like to ask a question. Please press star followed by the number 1 on your telephone keypad again it is star 1.

Pause for just a moment.

Your first question comes from the line.

Kyle Joseph with Jefferies.

Yeah.

Hey, good morning, guys.

Good quarter and thanks for taking my question Kelly.

Kelly I appreciate the color you gave on kind of the outlook for credit normalization.

Yeah, I know, it's early but can you give us a sense for how you.

We expect the changes in the child tax credit Q2 impact the business. Obviously, we have stimulus and then in the rear view, but.

Some changes and child tax credits already hitting this month, but.

Just talk about kind of the the impact you see both on the credit as long as on kind of the sales and demand side of the business.

Yeah, Hey, good morning.

I appreciate the question.

So.

What I had indicated in the prepared remarks is that in the back half of this year, we do expect that.

Between the child tax credit.

Or are having rolled out centralized decisioning.

I just think the excellent level, what we're our team is performing right now all of these factors are contributing to customer payment activity. We also refer to that as a.

Customer renewal percentage.

That's going to continue to be elevated or higher than what we saw before coming into the pandemic over the last.

At the same time, we don't expect that the liquidity at our customers is going to be as strong as it relates to dollars provided by the government.

So what we've looked at and pick a lock up you may be looking at is that the enhanced unemployment and other stimulus that our customer benefit.

Last year at the back half of last year was just a greater number of Florida number, but if you were to take any estimate of the child tax credit benefit and multiply that times 4 to get a monthly number so.

Just the magnitude of the liquidity of customer habits support that any contribution.

Benefiting from stimulus finance unemployment.

He may have benefited from our customers benefit from last year, just not going to be as high as here.

So we've factored that into our view and outlook, which is different than what we did in the prior 2 conversations we've had on this.

Melissa.

Best estimate at this point in time, we did feel that last.

On the 15th.

Is that liquidity start to come into the market.

Watch net daily we're paying very close attention to what that's going to look like at the end of the month that will continue to inform our views on the business for the rest of the year, but but it's early and there are a number of factors that could continue to impact how the customer uses that liquidity.

Last weeks as Douglas and good morning, I just want to say 1 other thing you may have noted in our comments is now 80% of our lease portfolio has been decision through a centralized decisioning algorithms and.

We believe that.

Half of the year will reflect that and propping up our renewal rates and our.

Write offs as well so theres a stimulus going on but there's also all the investments we've made in optimizing our decisioning that are reflected in our outlook and we're really happy with the results of that.

Got it very helpful.

1 follow up for me.

In HIV, we didn't.

The question about inflation.

Our right to be honest it feels like we were actually recently talking about deflation of consumer electronic devices is not negatively impacting the business can you talk about.

Some of the puts and takes about inflation in terms of really since the demand for credit from the consumer for for any number of products.

Yes.

I'll start and I'll, let Kelly.

Steve chime in but.

Experienced the same economic impacts as everyone else is in terms of inflation, we're seeing price increases.

In our products and raw materials for our products and fuel transportation.

Lesser extent wages, but the good news is our merchandising teams.

Just doing a phenomenal job of keeping pace with all of these cost increases and we're able to pass along a lot of this cost increase to our customers in terms of lease rates and we're really careful about how we do that and making sure we're hitting the right price points for our consumer.

As inflation increases.

This is bill.

We tend to see historically pressure on retail and if you think about it you've got an appliance that cost.

<unk> thousand dollars, if you've got a 15% inflation out there in the marketplace that are Brian's goes from $1000 to $1150, which is all upfront cost for the consumer and our.

At least 1 world, where we're leading with the payment we may be able to pass on only $10, an additional payment costs to that consumer and spread it over 24 months, which makes it a lot more manageable for the consumers. So the sort of carry on effects of that as we see more demand falling into our segments.

And we.

We get the benefit of an expanding lease to own marketplace. So I would say if theres any counter there on inflation as cost of living increases for our customer we see a bit of pressure on the collection side of the business and renewal side of the business.

However that has historically been in periods without stimulus as Kelly mentioned, we will have ongoing.

Stimulus for the foreseeable future.

Yes.

I would add just a few quick things right, we're clearly seeing inflation in our business not surprised everybody in the retail world is.

Some of the places, where it's showing up I don't want to tie this back to our outlook.

We are.

Acting to spend more money.

Ongoing on lease merchandise inventory. This year there are 2 factors driving that 1.

Written more agreements this year right. So we're growing our lease portfolio size. So we need to backfill that inventory that we're putting out into our customers' hands.

Great thing right. The other side of it is that we're seeing.

Our categories right, 2% to 8% increases in costs and those costs include transportation costs as well both in terms of landing that that inventory as well as in the cost.

Complete that last mile delivery from our stores to our customers all of them. So those factors are baked into.

The outlook that we provided I mean again, it's our best estimates at this time, it's an interesting world. We're all operating in right now so we're but we're paying very close attention to all of these inputs.

The great thing is with centralized decisioning.

Improvements in operations.

Dialed in and our teams are right.

2 we felt like we were reacting pretty quickly and at least at this point hopefully as our performance in the first half as we have demonstrated that we stay ahead of these curves a little bit.

Yeah.

Got it thats it from me Thanks, a lot for answering all my questions.

Thanks, Joe.

You have a question from the line of Anthony <unk> with loop.

Capital market.

Good morning.

Thanks for taking my questions, let me add my congratulations.

I know, it's probably won't continue but I could get used to these double digit comp store sales increases.

So I guess just a couple of really quick housekeeping questions.

What was the ending company operated and franchise store counts.

Yes, let me get that for you to Anthony.

The count ending company operated store Count was 1087 stores and the franchise was 200.

47 stores, bringing us to 1334 stores total.

Got it thanks.

And my next question and I know, it's probably hard to parse this out but I would just love to get even just sort of directionally like it sounds like even when you think about.

Lease merchandise write offs.

And these much lower levels that we've seen obviously a lot of that is.

All of the stimulus money right.

Which is obviously helpful from a customer payment activity perspective, but it seems like part of it is the is the centralized decisioning, where youre, just making better credit decisions and if you make better credit decisions all else.

Being equal you're going to have lower merchandise write offs. So how do you think about in the back half of this year right, you're sort of like you've got the hunt and enhanced unemployment benefits going away.

And you probably don't have much of an impact from the flu.

On that last round of stimulus, but then you do have the expanded child tax credit and then you also have the.

You said, 80% of your lease portfolio generate generate expense like the seasoning, so I'm almost thinking that could be.

A wash from a from a lease merchandise write off respectively. How do you sort of think about that or parse that out.

Yeah. So great Great question Anthony This is Kelly.

And what I'd say is that.

As you kind of went through that you can see there.

A lot of things that are factoring into that right now we operate.

It's a fairly complex business in an environment right now, which is probably as complex as anybody in this market that we're seeing it. So I appreciate that youre recognizing there are a lot of puts and takes are kind of going into that.

What we would say in general just kind of coming back to our longer term view on write offs is that we do continue to expect the business to operate in a 4% to 5%.

Annual write off percentage.

As we think about the back half of this year.

What we had indicated again in.

We tried to give you some of the some guidance here in my prepared remarks is that we do expect write offs to be lower than kind of our pre pandemic levels and thats largely driven by centralized decisioning improve.

Improvements in operations, all the things that you kind of hit on there as well as the.

The outlet.

Child tax credits and the liquidity in our customers' hands.

At the same time right, we would expect it to be higher than last year, I mean, just to put it in the context right Q3 of 2020 are write offs or 2.4% that was an all time historic low as best as any of US can look back and see <unk>.

Business so.

We're not anticipating that would that we would be at those levels.

And then if you.

Look at the back half of the year in total from a write off perspective, we do expect to be.

Slightly above what we did last year, but again below what we've seen from a historic kind of long term perspective of the business.

Just to reiterate just to reiterate the virtues of centralized decisioning with 80% of our portfolio.

Having gone through that and we're effectively sizing the right payment for the customer to set them up for success.

Ultimately set us up for success reduce servicing costs et cetera, and take the friction out of.

Out of the relationships, we have happier customers ultimately long term returning customers and what this all results in as lower product returned back to us.

And lower write offs, which means we have a healthier portfolio, we have happier customers and we see a revenue benefit from more on time payments.

And that's further benefited by all the time.

Yes, I think we've put in place for customer payments, where they can pay on an app and our my account online. We now have 77% of our customers paying outside of store and so when we make it easier for the customer to pay us and we set them up for success in the centralized decisioning translates to both the topline and the bottom line, which is.

Reflective in our outlook.

Got it Thats very helpful keep up the good work guys.

Thank you. Thank you Anthony.

Your next question comes from the line of Bobby Griffin with Raymond James.

Good morning, everybody. Appreciate you, taking my questions and good job this quarter and congrats on the ongoing strong performance.

Thank you. Thank you.

I wanted to dig into the south taxes, not really the impact this year just based on it really kind of next year based on how I understand it lowers the refund partly for the receiver of those tax credits neck.

Next year.

Spread the payments out over this year. So typically you guys see earlier.

When you get big refunds I believe so do you think this has the potential to maybe smooth that out a little bit and the first half of next year or is the offset that you're a consumer won't have quite as much liquidity in their hand, a head he's trying to unpack how that might play out and I understand it. The first time this has ever happened so.

We're still kind of working from estimates here.

No I appreciate that question, Bobby and also looking at a color there and I think youre spot on we're working on in the environment.

No one's ever operated and so.

Making our best estimate based upon what we what we know today.

So first of all I mean, the child tax credit not only did.

Good.

The recent change in the law kind of accelerate the payment right expands the universe of folks that are received but it also increased.

Overall size of the total credit with half of it being received over monthly payments in the back half of this year and the rest would be received as part of.

Okay.

In individuals' annual tax return later next year so.

We'll see how this plays out but.

Roughly half of that will come to our consumers that receive the child tax credit this year in the form of those monthly payments via the other half next year. So.

Your question about impact on EPS.

You are right.

Business in that regard is has remained consistent in terms of when our customer has more liquidity they pay us better and that includes typically an increase in early payouts.

So we would expect to see some of that in the back half of the year and we certainly factor that in as we've thought about our portfolio size through the course of the year the impact that has on.

Our revenues and the rest of the business.

It's still too early for us to really understand.

Whats going to happen on a monthly basis and of course through the course of this year.

And it's Super early to start to anticipate what's going to happen.

In February March April next year in terms of how these dollars are used.

But I think it's important to note what I said at the beginning right at the absolute dollars provided to this tax credit are significantly higher than what they were kind of coming into this recent change.

And so our view right now is that that element of it wouldn't have much of an impact as to how.

Liquidity is impacted early next year.

With our customers' tax returns, so hopefully thats a little bit helpful to call we provided there.

Yes, that's helpful and then I guess lastly on with.

Let me unpack the second half EBITDA margins a little bit.

Your commentary just the amount of help answer some of it but the.

The lease portfolio is performing very well.

By single digit you referenced year over year.

Year, and then we look at the.

Second half implied EBITDA margins are downloadable from the first half and understand some of that is.

Merchandise write offs, but what some of the other parts because it does seem like the business had some pretty strong momentum right now good payment a lot of things <unk> been working on and.

It seems like there could be some upside to those that can.

While margins I, just want to make sure. There's some other areas that we're not missing.

Yes, great Great question, Bobby I mean, we're working to date are kind of going on in that we've got right..1 we are.

Some of the under spend if you will that happened last year right. We certainly in Q2.

Have you been trickled into Q3 and Q4.

Tighten our belts worked out too far in a few different areas 1 of those be in marketing right.

And so and so forth.

There is some catch up is kind of going on there from an opex for Opex perspective, the other is and we're taking the opportunity to invest in the growth.

Business right I mean, we've often talked in the context of capital allocation around first and foremost investing in the business as long as we're achieving appropriate returns and we have that opportunity right now so.

There is some increase in opex around marketing personnel some some consulting in some.

Some other projects that are going on that we do expect to.

To deliver not only value this year, but its value into 2022 and beyond.

Yes.

The last thing I would mention is if you look at our.

Renewal percentages of our lease portfolio in the first 2 quarters of this year, they're running several hundred basis.

Points ahead of where we've been in.

While we were going to see that normalize in the latter half of the year that normalization.

So higher rates than we were pre pandemic, but nonetheless lower than we were in the first and second quarter.

It's kind of a 100% margin normalization, so that brings our margins back in line with what the outlook.

As indicating there and as Kelly mentioned on top of that we've got some additional investments in the third and fourth quarter that we believe will benefit to 2.

2022.

Awesome I appreciate the detail congrats again on the good first half performance.

Thank you Bob Thank you.

<unk> it.

Your next question comes from the line of Brad Thomas with Keybanc capital markets.

Hi, Thanks, and congrats on a strong first half here.

Wanted to just follow up on on the last line of questioning around.

Round, the second half guidance.

And maybe talk a little bit more about the revenue side of things.

It does feel like.

Really had some nice.

Momentum in the size of the portfolio and.

So we're just going to go back and look at the numbers. It does feel like your second half has revenue is trending.

And year over year and down sequentially.

So just trying to understand how we should be thinking about.

Puts and takes as we think about revenues.

Yes, Hey, Brad its Kelly good good question.

Again, I would remind you right and I know you know this well.

So.

We are a seasonal business and typically Q3 is our low point.

In a normal year.

As it relates to revenue and last year, it was anything but normal as we all know.

This year, if we think about theres been stimulus in the market in Q1, Q2 Q3 and in Q4 so.

Yes, we should see a somewhat normal distribution of revenue from quarter to quarter. So.

Youre right were expecting sequentially that cute from Q2 to Q3 revenue would be down, but we would expect that and then kind of any typical year.

From a year over year perspective.

And Douglas illness.

Part of his description of same store revenues. The biggest driver in Q2 was the increase in our portfolio.

And so we and we.

We are going to enjoy the benefit of that going into the back half of the year at the same time that was just mentioned a second ago.

Other component.

Component to.

So our revenue is customer renewal activity right their payments.

And in Q1 late Q1 and pretty much all of Q2, we were running at.

Customer renewal percentages over 300 to 400 basis points higher than.

Pandemic levels.

So we expect to start to normalize.

Hang on to certainly the benefits that we've driven through centralized decisioning and and other operational changes or investments.

But we don't expect to kind of continue to comp over at those kind of levels. So when you when you start to kind of pull that down.

Revenue.

Could be flat to slightly up from last year on the back half basis, but not the type of year over year growth that you saw kind of 19 going into 2020, if that helps.

Yes that was the last thing I would say is we're also comping over the third and fourth quarter.

Of last year.

Our pretty saw strong payment activity as well so it's really.

Brad the story of Great portfolio health, great portfolio size, but the differences in the revenue as the renewal rates year over year.

Got you that's very helpful.

Bobby.

<unk> question back to EBITDA.

If you try to bucket it into the REIT ops versus cost inflation.

Youre seeing versus some of the investments that youre, making in the business.

Could you hazard, a guess as to how much each of them is a headwind for you based on what you are guiding right.

Right now.

Yes, I'd say that.

They're all kind of on a year over year basis contributing to kind of an increase if youre looking at in terms of kind of absolute dollar cost also as a percentage of revenue so yes.

They're not exactly equally rated weighted Brad but.

But each of those are impacting it.

Yes.

Across the board there.

Great really helpful. Thanks, so much and congratulations again.

Thanks, Brad.

Yes.

Your next question comes from the line of Bill Chapell with Chewy.

Securities.

Thanks, Good morning, and congratulations.

Hey, Bill.

Hey.

2 questions first 1 on centralized decisioning.

Douglas you said before.

Now at 80%, where should that number go to and weird.

Is it the second half, where we you will see the full kind of benefits from that or is that really carryover into 2022.

Yes.

You may recall we.

Launched centralized decisioning to our entire store portfolio in April of 2020, as the pandemic hit we had to.

200 stores or so.

Prior to that but we've been testing for over a year and seeing great results, we rolled it out to the rest of the portfolio then and so what Youre seeing now is this 80% us.

So effectively we're approving everybody that comes into our stores almost everybody through centralized decisioning, but it has to bleed into the portfolio we have leases.

Poor manually decision to pre rollout that are rolling off and so and we would expect to see kind of mid next year I was getting to approximately 100% of the portfolio decisions through that but we're enjoying the benefit of that this year and we should.

So to get that additional.

<unk> is up 20% over the next.

6 to 9 months.

Got it. Thank you and then also just.

As I look at kind of year over year seen lease growth.

How much is.

Impact of kind of product selection.

I would think that.

Starting with.

A year ago and for the first couple of quarters. After that it was heavily on home furniture and housing and stuff like that as we were all kind of stuck at home and needed new refrigerators and what have you has that changed materially and is that affecting the numbers or are we still seeing pretty much the same product selection.

Sure.

With a lot of I'm going to let Steve Fulton's here and I'll, let Steve handle that Hey, Bill. Thanks for the question, Yes, you nailed it we're absolutely seeing that.

Very similar product selection and results that we saw throughout Q2, so seeing nice growth across our entire business, whether it's furniture appliances electronics.

So.

Sure I'm going to change.

Over the past 6 to 9 months, even as we've reopened.

No real change.

And as we've reopened as I've said in prior prior calls so nice growth.

In the appliance business early but that actually continued and we're seeing nice growth in furniture.

No, whether its upholstery bedroom or or the associated accessories. So nice consistent business that we've seen from the start through now.

Great. Thanks, so much.

Thanks Bill.

Your next question comes from the line of Vincent <unk> with Stephens.

Hey, Thanks. Good morning first question about the Gen next store rollout so.

So <unk>.

Great success there.

Maybe if you could talk about now youre at sort of 6.

6.9 months into this any learnings you've had versus when you. Initially started and then I know you talked about.

The rollout and trying to be disciplined about it but given the success you've had just sort of wondering when youre thinking about.

The build out.

If you could accelerate or how you how you think about potentially expanding that thank you.

Sure Great question Vincent.

Well first of all as you know Jim.

As part of our larger market repositioning strategy.

<unk> re.

Reinvesting in stores that we love that are keepers and renovating them. It also includes relocating stores, maybe down the street to a better better center in the market. So we love and consolidating stores, where we feel like we have multiple stores in a market that needs.

Stores in larger E comm fewer larger stores and so we're doing all of the above we've created pro forma is for each of those that.

That are unique to each of those scenarios and I'm happy to say that as of today. We've opened 64 stores and we're on track to our expected returns, which are as we said they're 25%.

Fewer than 5 year payback, we typically look for a payback within the initial lease term of our.

Of our real estate, which is typically 5 years and so we're really happy with that but we don't just look at these in terms of how we're doing to our pro forma we really measure how many stores are doing versus our control group, which are in our core stores.

Stores in our portfolio and so what we're really happy about is we're up over 20 points and.

Our recurring revenue written into the portfolio, which is our sales metric over our core portfolio, which is very promising in our customer accounts are exceeding our expectations. So all that being said, we're very bullish we are moving.

As fast as we can on this.

As I think I've mentioned in prior quarters, we've intentionally been shortening our lease term over the last 5 years to be able to pivot our portfolio and so we're building a robust analytically driven real estate team.

It was really hit the ground and they're producing a lot we have a lot.

More stores in our pipeline.

The pipeline is building for next year and part of our Capex guidance going up is related to the to the pipeline of stores that we have slated for 2022, and that's really a timing issue because we're going to spend money in advance of our of our openings importantly.

We.

We can move fast, but we can only move as fast as the real estate market will allow us to move and Thats based on sort of market conditions, what availability there is permitting landlords and construction timelines and so we build infrastructure and both are.

Capital.

Allocation and in our Opex.

Opex part of the investments that Kelly mentioned before in the second half of the year, our investments to build squads that we have on the ground to launch these stores to build.

More infrastructure and our operations team to make sure we have the people ready to run these stores and 2 Grand open our marketing functions.

We have field teams available to do that and so we're building all of that and in the latter half of the year and our outlook Ken and.

And Trust me I'm aligned with you we want to move based on the results. We're seeing we want to move as fast as we can but we also want to be judicial and prudent about our site selection and making sure we're making the right decisions.

Okay. That's.

We're making shipments are exciting to hear that Europe over 20 points versus the control group. So really appreciate that.

The next it is probably just a quick question, but on this kpis with the lease portfolio side and I know you introduced earlier this year, but maybe Kelly if you could help us understand how to use that when we think about our model.

Our modeling.

Revenues going forward.

Yes, great Great question so.

What that represents is as we start every month.

<unk>.

The size of the revenue that we collect across all of our leases.

So if you think about where we ended the quarter right $132.8 million.

All of our customers paid 100% of their lease payment then we would collect $132.8 million in the month of July.

Alright, and so.

Is that potential monthly collectable revenue now, we don't collect 100% right.

And so that factors into what we end up reporting in revenue and then.

Within the month and then within the 3 months of a quarter right.

Would typically see growth or change.

And that portfolio size.

Also would impact kind of that revenue calculation for the quarter and for the year.

But yes that was mentioned the growth in that portfolio year over year of over 8%.

Contributed to about 2 thirds of that 11, 2% positive same store revenue.

<unk> growth that we posted so we're trying to help you and others understand how impactful the portfolio is on delivering kind of long term sustainable growth on the topline in the business and that last third as it related to collecting at a higher rate than we are renewing our customers at a higher rate than we did last year and so.

To the extent we renew at.

At the same rate as last year, our same store revenues would be closer to the portfolio size.

Great. That's very helpful. Thanks very much.

Your next question comes from the line of Jason Haas with Bank of America.

Good morning, and thank you for taking my question.

Question.

Have you had a chance to take a look at how collections have been.

Pulled back the enhanced unemployment versus state that habit.

Yes, Jason Great question I appreciate it.

The question here.

What I'll say is yes, we've looked at it we.

We watch our business daily on a type of store level. So.

So it's something that we're very tuned into.

And as we watched the impact that that has had across the portfolio and it certainly has weighed into how we think about the outlook for the back half of the year.

Don't typically provide that level of detail.

We were kind of down to the same level, so I'm not going to comment specifically, there, but what I will say and as you've heard this from us before right.

So when our customer is more liquid.

They pay better.

It's based on that it's a fair assumption to kind of hear that 1 step further and.

I think that in those states.

Taylor.

Discontinued enhanced unemployment, we saw slightly different payment activity than we did in the other states.

Okay got it and then as a follow up.

So youre definitely tracking well above where you had expected based on the longer term plan.

<unk> learned during the spin off.

Terms of topline and margin. So I'm curious as we think longer term both like as we get into next year sort of like some of this has been driven by external strength. So I'm curious.

How long that lasts for you think there could be some benefit.

All the way into next year from that and then just in terms.

We are doing internally on it sounds like you are tracking above plan. There. So you just kind of curious what the big pieces are in terms of relative to where where you thought maybe at the beginning of the year Youre tracking about them. We can expect to continue.

Yes, Jason I appreciate that.

So it's a bit early for us to provide guidance.

As it relates to 2022, particularly in light of all the moving parts that we're continuing to see in the market right.

What I would say kind of bringing it back to that 5 year outlook that we did provide before.

Where we sit today our lease portfolio size is larger.

That's where we anticipated being halfway through 2021, so that is clearly something thats going to help kind of carry into 2022 and beyond in terms of kind of where we fall across that that 5 year execution strategy.

As it relates to the rollout of <unk>.

Our new store.

Store format right the consolidation in certain markets, we're kind of right on schedule with what we had penciled out so the big driver drivers next year right. As we think about kind of resetting relative to that initial 5 year plan that we provided is number 1 will be net lease portfolio size number 2.

Where are we.

We didn't gain at right house, our customer paying kind of coming off of any government stimulus and enhanced unemployment benefits that they provided in 2020 in 2021.

But we certainly are paying close attention to that.

Well, we're glad you all as we have kind of better clarity into next year and beyond.

Got it really helpful. Thank.

We collect all of them.

Your next question comes from the line of Tim <unk> with North Coast Research.

Good morning. Thank you for taking my question this one's for either Steve or Douglas, We view you guys ecommerce.

Versus capabilities is truly a key differentiator versus the rest of the market.

What's available to them.

Can you highlight just the growth stats again, you're seeing in that channel and maybe outline what you guys see as the biggest hurdle.

For brakes.

<unk> accelerating growth through that channel because I feel like I think sequentially it.

The same growth rates, just kind of curious what might be a big.

Hurdle to continue accelerating growth in that channel.

Thanks, Tim.

Tim This is Doug I'll start off and I'll, let Steve finish and were really happy with the performance of our E. Com channel, we had 15% growth in the quarter year over year.

And while that is a slow.

Slowing of our overall rate we are comping over the large increases in our E. Comm business that we experienced in Q2 of last year when the.

Pandemic hit and so we've got which is up roughly.

54% I believe during that quarter and so while we're comping 15% of our.

4%, we're happy with that.

So last year and Im sorry, the 54% was what we rode into the portfolio. So we're still comping at 15%.

Last year, we saw a surge in demand I think as the year went on in the pandemic.

Continued we went through some inventory.

<unk> corrected themselves and where we stand today, we're super happy with both the demand and the optimization of our Decisioning on our E com platform and the technology advancements that we've made are are really really proud of and I think theyre going to add a ton of value for us as we move forward. So I'll, let Steve just talk about those yeah, Tim Thanks.

Thanks for the question just to add to it.

Definitely say the folk.

Focus of our technology investments is where the opportunity lies first.

First and foremost I wouldn't call it out at just our digital marketing and our pivot to putting more of our marketing dollars in that area to target engage.

<unk> customers and a broad broader sense, but as far as the technology investment, we just need to continue to improve that user experience that we have in our e-commerce platform through content personalization and functionality.

We need to continue to broaden our assortment give that customer.

<unk> selection of.

Product in our core categories as well as an expansion into new categories that are not even in yet.

Tom.

Additional piece would be around inventory visibility, Doug had mentioned that we're pleased with our inventory position and that inventory that supports our e-commerce business, but the more and more focus that we put on visibility of that.

That inventory to our customers. So they can get that product faster in their homes and the last piece would just be a focus on turning the controls over to the customer and really create that self service environment that allows them to access their account manage their account through the mobile app or our online portal with my account so I would.

Good.

Change it more to where the opportunities lie and where we need to continue our focus to drive continued growth.

That's really good color guys. Thank you so much.

There are no additional questions at this time I'll turn the call back over to Mr. Douglas Lindsay for final remarks.

Remarks.

Thank you operator, I really appreciate it let me just conclude by saying I could not be more pleased with our second quarter results consistent strong results don't happen without a lot of hard work by a lot of team members and I want to thank all of our stakeholders from our shareholders to our franchise owners to all of our team.

Members in our Aaron's stores, and our Aaron's store support centers and it would have in manufacturing.

His support and partnership is critical.

So our success I continue as you can tell by the tone of this call to be confident we have the right team the right strategy and the right market opportunity to continue to grow.

Grow our business to return capital to shareholders and to create a rewarding future for our stakeholders and customers I want to thank you for joining us today and have a wonderful afternoon take care.

Ladies and gentlemen, this does conclude today's conference call you may now disconnect.