Q3 2021 Aaron's Company Inc Earnings Call
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Thank you for your patience the iron companies that coated 2021 earnings conference call, we'll be talking in a few minutes time.
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Good morning, My name is breaker and I will be your conference coordinator.
At this time I would like to welcome everyone. The Orange company.
Third 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 will now turn the call over to Mr. Michael Dickerson, Vice President of corporate Communications and Investor Relations for Aaron's you May begin your conference.
Thank you and good morning, everyone welcome to the Aaron's Company third quarter 2021 earnings Conference call. Joining me. This morning are Douglas Lindsay Aron, Chief Executive Officer, Steve Olsen, Aarons, President and Kelly Wall, Aron 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 got Aaron's Dot com. During this call certain statements, we make will be forward looking including our financial performance outlook for 2021.
I wanted 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 December 31, 2020, and other subsequent 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.
In 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 to discuss our third quarter results I'm pleased to report another quarter of strong operating performance and continued positive momentum at the Aaron's company.
Nearly one year since our separation, we have significantly strengthened our leadership position in the direct to consumer lease to own market.
And are tracking well ahead of our long term strategic plan continued investments in our best in class E Commerce channel Predictably Decisioning engine and our high performing Jim next doors are driving greater productivity and growth in our business through the tremendous efforts of our team we continue to transform <unk>.
<unk> go to market strategy by delivering customer friendly digital solutions.
Easy lease approvals and then hance shopping experience.
Since 1955 Aarons has been committed to serving a customer base that is too often been overlooked are excluded from preferred retail experiences.
Today, we are leveraging our long and deep understanding of this customer segment to say, yes, when others say no.
To provide our customers with access to great products on our flexible and affordable terms and to deliver a seamless customer experience not only across our distributed store network, but also digitally through our award winning E Commerce platform.
Our customers interact with us in one of our beautiful new Gen next doors or via their mobile device. We continue to provide a growing assortment of products, they want and need with low monthly payments that fit their budget and best in class customer service.
I am pleased to announce that our third quarter 2021 results have again exceeded our expectations through continued growth in the size of our lease portfolio same.
Same store revenues and ecommerce revenues.
As a result, we returned another 37 $5 million to shareholders in the quarter in the form of share repurchases.
This brings us to a total of nearly $100 million of capital returned to shareholders. Thus far this year.
With strong third quarter results, we are again, raising our revenue and earnings outlook for the full year of 2021.
In the third quarter same store revenues grew four 6% compared to the prior year the sixth consecutive quarter of positive same store revenue growth.
The improvement was primarily driven by an eight 7% larger lease portfolio size entering the third quarter.
Partially offset by a lower level of customer payment activity compared to the prior year.
Our same store lease portfolio size continues to grow at a healthy pace.
Ending the third quarter up six 1% compared to the prior year. We attribute this growth primarily to strong demand for our products higher average ticket.
The favorable impact of centralized lease decisioning and the residual impact of government stimulus on the portfolio.
As discussed previously our predictive lease Decisioning engine is working very well.
And enables us to better match, the customer's lease payment with their financial position with a goal of helping more customers achieve ownership and lowering our overall cost to serve in addition, our lease decisioning algorithms allow us to be flexible in responding to changes in the macroeconomic environment and to optimize outcomes that <unk>.
<unk> profitability as of the end of the third quarter more than 83% of our total lease portfolio is comprised of lease agreements. There were originated through our centralized decisioning platforms. This compares to approximately 60% at the beginning of 2021.
As we mentioned last quarter lease payment activity in 2021 has exceeded historical levels due to the government stimulus provided to our customer leaving.
Leading to higher lease renewal rates and lower write offs as we saw in the third quarter and expect to see over the next three to four quarters customer payment activity continues to normalize.
Because of investments we've made in centralized decisioning and lease servicing technologies, we expect 2022 lease renewal rates to ultimately settle above pre pandemic levels, but below the level, we expect for the full year 2021.
We also expect lease merchandise write offs in 2022 to settle below pre pandemic levels, but above the level, we expect for full year 2021.
In addition to investments in our Decisioning technology. We also continued to invest in our E Commerce channel and our Gen next strategy.
Our ecommerce channel continues to grow at double digit rates, representing 14, 3% of total lease revenues in the quarter.
The growth in our portfolio of leases generated online is driving improvements to our overall margin performance as we leverage the fixed cost structure of our store and supply chain assets to serve customers that are seeking a virtual shopping experience low monthly payments and free delivery and ongoing investments in digital.
<unk> and our customers online experience are driving growth in this important channel specifically E. Commerce investments are leading to an enhanced shopping experience driven by personalization and Richard product content.
Improved customer visibility into products that are available for same or next day delivery.
And a broader assortment that includes new product categories. Today, we have more than 3000 products on Aaron's dotcom, which has doubled from a year ago and our express delivery program accounts for approximately 30% of E Commerce volume.
Because of this we are generating a higher customer conversion rate lowering our effective acquisition costs and delivering higher customer satisfaction I could not be happier with the efforts of our team and the growing marketplace, we're creating on Aaron's dotcom.
As we discussed last quarter. Our Gen next doors continued to perform at a high level.
During the third quarter, we increased the size of our Gen next door set by 'twenty two.
In the quarter with 86 location and we believe we remain on track to have more than 100 generic stores by the end of the year.
To date, our portfolio of generic stores is generating results that are exceeding our targeted 25% internal rate of return and five year payback period.
Equally as encouraging monthly lease originations in <unk> stores opened for less than one year again grew at a rate of more than 20 percentage points higher than our average legacy stores.
As we accelerate the rollout of new Gen. Next doors, 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 company's strong performance in the third quarter.
Our merchandising and supply chain teams have performed exceptionally well by getting ahead of market disruptions by procuring inventory and expanding output from our woodhaven manufacturing facilities.
As a result, we are entering the holiday season with strong inventory levels in both our stores and distribution centers.
And we've been increasing prices to respond to inflationary pressures and maintain product margins.
I remain encouraged by the underlying performance of both our store and e-commerce channels as we're tracking well ahead of our five year plan on revenue and earnings.
I'll now turn the call over to Kelly to discuss our financial results.
Thank you Douglas for the third quarter of 2021 total revenues were $452 2 million compared with $441 million for the third quarter of 2020.
An increase of two 5%.
The increase in revenues was primarily due to the increased size of our lease portfolio, partially offset by the expected lower customer payment activity during the quarter.
The reduction of 79 franchise stores during the 15 month period ended September 32021.
Lease revenues in the third quarter of this year also benefited from an increase in ticket size or monthly rent per agreement.
That is offsetting the inflation, we are experiencing in the cost of lease merchandise.
On a same store basis lease in retail revenues increased four 6% in the third quarter compared to the prior year quarter.
As Douglas mentioned this is our sixth consecutive positive quarter of same store revenue growth.
Leases originated in both our e-commerce and in store channels contributed to our revenue growth, which was primarily driven by a larger same store lease portfolio size.
Partially offset by the expected lower customer payment activity in the quarter.
More specifically in the third quarter of this year, our customer lease renewal rate was 89, 7%.
Which was approximately 230 basis points higher than the three year third quarter pre pandemic average, but was approximately 130 basis points lower than the third quarter of last year.
For any period the customer lease renewal rate is calculated by dividing the amount of customer payments recorded on an accrual basis as of the end of such period by the amount of total customer lease payments due for renewal during that period.
As discussed on our last earnings call the benefits to our customer from government stimulus programs declined in the third quarter and as expected resulted in lower customer payment activity as compared to the prior year, we expect customer payment activity to continue to decline year over year for the next three or four quarters.
And I will point out that a 100 basis point change up or down and customer lease renewal rates or write offs or the one $6 billion annual portfolio of total collectible customer lease payments results in a $16 million change in EBITDA.
Additionally, we continue to expect that customer payment activity will benefit from our investments in centralized decisioning.
We estimate that this technology has improved lease renewal rates by over 100 basis points compared to the pre pandemic levels.
I'll also materially improving the customer experience and simplifying the day to day activities at our stores.
E Commerce revenues increased 13, 3% versus the third quarter of 2020 and represented 14, 3% of overall lease revenues compared to 13, 1% in the third quarter of the prior year.
We continue to make investments in this important channel that we believe will continue to drive long term growth for the company.
The company ended the third quarter of 2021 with our lease portfolio size for all company operated stores of $132 $2 million.
An increase of five 8% compared to our lease portfolio size of $125 million on September 30 of last year.
As a reminder lease portfolio size represents the next month's total collectible lease payments from our aggregate outstanding customer lease agreements.
Management believes this is one of the metrics that is important in understanding the drivers of future lease revenue.
Operating expenses, excluding restructuring expenses and spin related costs were up $15 $7 million in the quarter.
As compared to the third quarter of last year.
This increase is due primarily to higher personnel cost and a higher provision for lease merchandise write offs.
Personnel costs increased $5 $1 million in the third quarter of 2021 as compared to the prior year, primarily due to higher wages in our stores additional personnel to support our key strategic initiatives and higher stand alone public company cost.
Additionally, personnel costs were lower than anticipated during the third quarter of this year, our staffing levels in our stores remain below our operational targets due to the current challenges in the U S labor market for retail based hourly employees.
Other operating expenses were relatively flat to the prior year period due to higher occupancy shipping and handling costs professional services and banking credit card related fees.
These increases were partially offset by lower advertising cost in the third quarter of 2021 versus the prior year period the.
The provision for lease merchandise write offs as a percentage of lease revenues and fees was four 9% for the three months ended September 32021.
Compared to an all time low of two 4% from the comparable period in 2020, the increase in write offs in the third quarter of this year compared to last year was primarily due to lower customer payment activity following several quarters, where our customers receive financial assistance in the form of government stimulus payments and supplemental.
Federal unemployment benefits. This normalization in write offs was partially offset by the continued favorable impact of our technology investments, which include decisioning algorithms and customer payment platforms as well as our teams strong operational execution.
As we discussed on prior earnings calls, we continue to expect that annual write offs will be between 4% to 5% of lease revenues and fees.
Adjusted EBITDA for the company was $53 6 million for the third quarter of 2021.
Compared with $64 3 million for the same period in 2020.
A decrease of $10 7 million or 16, 6% as.
As a percentage of revenues adjusted EBITDA margin was 11, 9% in the third quarter of 2021.
Compared to $14 six for the same period in 2020.
This expected decline in adjusted EBITDA, and adjusted EBITDA margin was due to lower customer payment activity higher lease merchandise write offs and higher personnel costs compared to the prior year levels.
On a non-GAAP basis diluted earnings per share were <unk> 83 in the third quarter of 2021, compared with non-GAAP diluted earnings per share of $1 10 for the same quarter in 2020.
Cash generated from operating activities was $30 $2 million for the third quarter of 2021.
A decline of $92 $6 million compared to the third quarter of 2020.
This decline was primarily due to incremental purchases of lease merchandise to meet increased customer demand and to mitigate the impact of anticipated supply chain challenges ahead of the upcoming holiday season in.
In addition, the cost of our lease merchandise was adversely impacted by inflationary pressure.
During the third quarter. The company purchased approximately 1.333 million shares of Aaron's common stock for a total purchase price of approximately $37 5 million.
And through a <unk> one plan continued to repurchase shares into the first month of the current quarter.
For the year to date period ended October 22021, the company has repurchased 3.034 million shares for approximately $94 million.
As of October 20 <unk>.
We had approximately $60 million remaining under the company's $150 million share repurchase program that was approved by our board in March of this year and ends December 31 2023.
Additionally, the company's board of directors declared a regular quarterly cash dividend in August of <unk> 10 per share, which was paid on October 5th.
As of September 32021, the company had a cash balance of $15 million.
No outstanding debt and total available liquidity of $248 million, which includes $233 million available under our unsecured revolving credit facility.
As Douglas highlighted in his remarks, we have again raised our full year revenue and adjusted EBITDA outlook for 2021.
For the full year, we have increased our outlook for total revenues to between 182 billion and $1 $83 billion. We also increased our outlook for adjusted EBITDA to between $225 million from $230 million for the full year 2021, we have maintained.
Our outlook for an effective tax rate of 26% we.
We expect depreciation and amortization of approximately $70 million and.
And we expect the diluted weighted average share count for full year 2021 to be 34 million shares.
We have not assumed any additional shares repurchased beyond what has been discussed earlier on the call.
We have also increased our full year same store revenues outlook from a range of 6% to 8% to a range of seven 5% to eight 5%.
This increase is primarily a result of the continued year over year growth in our lease portfolio size.
We have maintained our expected capital expenditure range of 90 million to $100 million, we have reduced our free cash flow outlook for 2021 to $30 million to $40 million primarily to reflect the significant investment in lease merchandise inventory. The company has made to mitigate the impact of global supply chain.
Challenges and the related inflationary pressures.
Based on our current inventory levels, we do not anticipate any material challenges in meeting our customers' product demand as we end 2021 and head into 2022.
As I have previously described the benefits to our customer from government stimulus programs have moderated in the third quarter. Our revised outlook continues to assume customer lease payment activity remains higher than the fourth quarter of 2021, when compared to pre COVID-19 pandemic levels, but lower in the fourth quarter of two.
20 <unk>.
At the same time, we believe 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.
Additionally, we expect write offs will continue to be lower in the fourth quarter of 2021, when compared to pre COVID-19 pandemic levels, but higher than the fourth quarter of 2020.
Finally, our updated outlook assumes no significant deterioration in the current retail environment state of the U S economy or global supply chain as compared to their current conditions.
With that I will now turn the call over to the operator, who will assist with your questions.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
We have the first question on the sidelines from Kyle Joseph with Jefferies.
Please go ahead.
Hey, good morning, guys and thanks for having me on and congratulations on a good quarter.
I just wanted to talk about your outlook for payment levels, I think and sorry, I missed it but I think you gave the write off levels for the quarter and then you talked about the long term outlook and just remind us about where that long term outlook is versus kind of that historical range kind of before centralized underwriting.
Yeah, Kyle it's Kelly.
It's a great question.
As we talked about write offs were up in the quarter as we expected paint customer payment activity in the quarter. It's also not as strong as what we saw in the back half of last year in the first half of this year again, we covered that on our on our earlier call.
As it relates to kind of what we expect going forward. We did include some some language in the earnings release and we've also covered this in prior discussions on the call last quarter.
As we move forward in.
And the customers no longer benefitting from the customer stimulus.
They've enjoyed.
Last four quarters, they're going to be less liquid areas, we've talked about in the past, where our customers less liquid or arps customer payment activity is lower.
So we do expect over the next three to four quarters that the customer type of activity will be lower than what we've seen in the last four quarters, but higher than what we experienced pre pandemic and the real driver. There is centralized decision and the other operational changes that we've made.
The centralized Decisioning, we estimate has added 100 basis points or better to our customer payment activity.
And as a reminder, I mentioned this in my prepared remarks, right at 100 basis point improvement is worth about $16 million on our $1 $6 billion annual lease portfolio size.
So as we move forward.
Coming out of this we'd expect to see just that right customer payment activity lower and that reflected in lower lease renewal rates as well as higher write offs, but we're encouraged again by the impact of centralized lease decisioning in the other operational changes, we've made which are having a long term positive benefits on the business.
Lets Douglas I, just add one thing to that and just this metric that we've provided this quarter renewal rates of 89, 7% as we look at that historically those rates, even pre pandemic and kind of the 80, 788% range and so we renew about that many of our customers the remaining balance up to 100% of.
We could collect would be.
Yes product that we returned in charge offs, and then us working with the customer adult why you sort of get them to ownership and Thats kind of what we do every day.
Three months when we when we go to work.
When.
The pandemic had in stimulus began to rollout after the pandemic. We saw those renewal rates increase roughly two to 300 basis points in the second half of 2020 that elevated even further in the first half of 2021 and now what we're seeing in the third quarter, what Kelly just described.
As a normalizing of our renewal rates, albeit to a higher level, we believe ultimately because of the centralized decisioning. Once we return to normalized levels over the next three to four months. So I just wanted to give you the timeline of kind of how that played out and what we're seeing as we move forward to support Kelly's comments.
Got it I appreciate the color and then a follow up on that.
Demand for new leasing is trending as we can with stimulus in the rear view, obviously in an inflationary environment on.
On consumer goods.
Broadly and normalizing credit environment out there as well.
Sure.
In the quarter, we've seen strong demand both in our stores and our ecommerce channel.
Our E Comm channel in particular because of our inventory position has returned to normal we can.
Comped up in E comm at 13%.
And that was comping over a prior year almost 44%. So we're really happy with that on the revenue side of things.
In terms of demand.
Obviously, there's been strong demand over the last few quarters as people are investing in their homes.
Continue to see steady demand going into the fourth quarter and while we don't have a crystal ball, we're optimistic about our inventory position and where we stand and are in the fourth quarter, but in terms of forecasting to manage.
Wait and see in the fourth quarter.
Got it and one last one for me.
Sounds like the Gen X stores are doing very well.
Hasnt performance, there kind of a shift in the outlook for the overall store count you guys provided when at the initials spin time.
It's interesting the stores are doing really well as I said, we're exceeding our pro forma.
As we compared to control groups or sales of what we deliver into our portfolio were up 20 points above our control group with a larger population of stores now 86 stores in generics. So that's really really encouraging we've got a full pipeline, we're going to do 100, roughly 100 stores. This year I would expect we do roughly the same.
Next year I think what's changed is maybe our outlook on <unk>.
Store closures the pace of store closures or what we've merged into other stores has slowed a bit as we continue to.
Watch the normalizing environment out there I suspect as the environment. The renewals environment continues to normalize we will go back to our same pace of store closures. Ultimately we think we can serve our 700 markets with fewer stores bigger E com in a more efficient cost structure and so thats still our long term objective.
But we're encouraged about the demand trends and the overall progress against our strategic plan.
Got it thanks very much for answering my questions and congrats on a quarter.
Thanks, Tom Thank you.
Thank you. The next question comes from Vincent Karen kick from Stephens. Please go ahead your line.
Thank you and good morning, Thanks for taking my questions. So first two questions. So first of all kind of a broad question and then second on the fourth quarter expectations, but so first maybe if you could talk about that touch again on the inflationary pressures and how that how you think that would.
You know that might affect your business or how you're handling it going forward, it's nice to see that.
Placed those orders and built inventory ahead of the holiday.
Holiday sales season, but just sort of how youre thinking about it.
Broadly in terms of how we should think about gross profit margins and then also.
Labor costs and anything of that nature. Thank you.
Sure Vincent I'll.
I'll kick off and I'm going to pass it to Steve Olsen to talk about specific product and supply chain issues.
We're experiencing the same economic impact as everyone else, we're seeing price increases in our products components fuel transportation wages. Our merchandising group has done a phenomenal job of getting ahead of it keeping pace with cost increases through price increases and our lease rates.
And the effort to preserve margin and we've done a great job of that.
We commented we're also our fulfillment centers are full and our stores are full of inventory going into the holiday season. So we've overcome.
Lot of that disruption and pivotal which I'll, let Steve talk about.
As inflation rolls through the economy and the home sector.
The number of customers. We believe are looking for payment plans will increase.
The cost of a retail product like a washer dryer sofa will go up.
And because of that upfront cost, particularly for our customer is sometimes an achievable and doable and so they look for a lease option instead, and we can sort of having them $1000 product an increase of $150 at retail we can pass a $10 increase to that customer that they can manage within their budgets over a 24 month period. So we.
Based on our experience credit credit tightening and inflation expands our market as our customers seek and offering other than a cash offering upfront. So we think its a net net positive as we move forward and we feel like we began to see some of that in the demand trends. So I'll take it Steve just on what he's seeing on the on the product side of things.
Great. Thanks, Doug Good morning Vincent.
Ill first start on the supply chain side so.
We've been very proactive as Douglas referenced in his prepared remarks, we transitioned.
Early away from direct import as we saw those container and ocean freight costs going up in and really transitioned to more domestic supplies with our existing suppliers and then went out and found new suppliers. So the merchant team has done a great job on that we have wood Haven, which gives us a great view into raw material costs from a furniture standpoint.
But allows us to pivot quickly and move to products that we may we may need to fill out fill our core merchandise.
Secondly, I will talk on the call it the pricing side. The team has done a nice job, we're very proactive with our suppliers. We have ongoing daily weekly conversations with them about what they're seeing and what are on trends around raw material cost and we're taking that information and as we received price increases.
As I said like everyone has.
We quickly look at our lease rates not only in the products that may have received the cost increases but across the entire assortment and we balance those prices across the entire price ladder to ensure we're maintaining our margin. So we continue to work through it but I'm pleased so far with how the merchandising teams supply chain teams are handling these inflationary environment.
And lastly, Vincent on the Labor question, you had and we're seeing hourly wage rates increase it's a very competitive market, but the wage rates that we've experienced thus far are consistent with inflationary trends that we're seeing in the overall economy.
So nothing NSS.
Okay perfect. Okay. That's very detailed very helpful. Thank you just a quick follow up so when thinking about the fourth quarter. So you know normally a busy holiday season.
Some competitors normal time, it would be doing I guess, some sales black Friday deals other things but.
Still not being in a normal season, then I know of course last year, we were in a normal season, but anything that how youre thinking about that.
Competitive landscape or how.
Basically retail is going to look like for the fourth quarter. Thank you.
Hey, Vince this is Steve again.
Not really going to comment on other retailers, but I will say as Douglas mentioned in his prepared remarks, and I mentioned, a few minutes ago, we're in a great inventory position.
We're pleased with the demand across our categories, whether it's furniture appliances or electronics, we've put together a great marketing plan to really drive our business in the fourth quarter, which really includes a further investment in digital marketing.
Those investments you really go out and find new customers engage with them and then drive them to our website.
<unk>.
Experience that great user experience to have on our website as well as drive them into our stores. So we're ready for the fourth quarter and we think we've put the nationally plans in place debt.
To make that happen.
Perfect very helpful. Thanks, very much.
Thank you.
The next question.
<unk> from.
Anthony to come back from the capital market. So Anthony. Please go ahead when you're ready.
Thank you so much for taking my question congrats on a strong quarter as well.
So a couple of questions first one very nitpicky.
But I have in my notes at one point, you said lease portfolio was up six 1% year over year, ending the fourth quarter than somewhere else I haven't.
Five 8% I'm trying to reconcile the two maybe I just heard.
Just misheard, what you said.
Yeah, Hey, Anthony It's Kelly I'll clarify that for you. So the five 8% that's the total lease portfolio size right, where the six 1% that is on the same store set.
Got it okay. That's helpful.
And then just in terms of I was wondering if you know if you were seeing any in terms of lease originations any sort of significant variation between your different major product categories in other words I guess.
Appliances really strong consumer electronics furniture I'm, just wondering is the strength broad based or are you seeing any particular.
Our performance or underperformance from a product category perspective.
Hey, Andrew This is Steve again, I'll be glad to answer that.
So we did see strong results across all three major categories, but to give you a little more specifics.
In furniture upholstery had a really nice Q3.
Lyons's laundry laundry continues to be.
A strong cadre with great demand and it's been that way throughout.
Throughout the last year, and then on the electronic side.
Some rebound in Tvs and continued performance in gaming.
Got it that's helpful. And then if I can just sneak one last one in I know in the past you've talked about some of the new product categories that you're that you've been testing your stores and rolling out into stores that I was wondering if we could get a quick update on that thank you.
Sure Anthony it's Steve again.
We continue.
To expand our product assortment as Douglas mentioned in his prepared remarks.
Our ecommerce business and is growing marketplaces over 3000 items, but specifically about what new categories.
Those new categories include exercise equipment small appliances power tools home office and electric bikes, but with that I'll say, we're constantly testing new categories, new items and Youll see us going forward continue to expand out our assortment and into new categories.
Even we're not in today. So we're pleased with the results in these new categories, but we're really focused on the long term and in this growing marketplace position.
That's very helpful.
Good luck with the holiday selling season and keep up the good work.
Thanks Anthony.
We now have a question from Brad Thomas of Keybanc capital markets.
Please go ahead when you're ready.
Hi, good morning, everybody and congrats on a good quarter.
Wanted to ask a few follow up questions here, maybe first just starting with the inventory.
Apologize if I missed it but just wondering if you can give us a little bit more color on.
On maybe in percentage terms, how much inventory will be up here as you head into the into the fourth quarter into the holiday season.
And.
How are you thinking about that sort of in a per store level.
Thinking about at the unit level given that we have seen some inflation just some more color on that investment and inventory would be great.
Yes, so <unk>.
So Brad it's Kelly so we're.
As we mentioned we are we did buy ahead right. So we're we're running at higher than normal inventory levels at both our FCS and in our stores.
I would say that on a percentage basis, we're probably running about 15% higher than our target levels and we really manage it across both our FCS in our stores because as we've talked about in the past our stores serve as many distribution hubs across across the us and so right now we're pretty full.
And.
We anticipated as we mentioned there'll be some challenges in the fourth quarter, we've had some opportunities to buy inventory kind of ahead of our typical cycle.
That combined with the inflationary comments, we talked about before it's put us in a higher position and we expect that will normalize over time, but we're we're in a really good position from a balance sheet perspective, and a liquidity possession.
Position. So we've taken advantage of that here, we were able to flex up and what we were able to buy we're going to err on the side of being a bit heavy going into the end of the fourth quarter and as we see our customer payment activity in the world hopefully start to normalize a little bit more right than we will look at optimizing those levels going forward.
Hey, Brian This is Steve just to add some.
Little more color.
That strong inventory position is across our key categories. So.
We feel good about where we stand in appliances, where we stand in electronics and where we stand in upholstery excuse me it furniture.
So we're ready for the fourth quarter and as we look into.
At the end of the fourth quarter and into Q1, we'll see how we what our inventory position will look like as we get into the holiday season, but it seems very proactive and as Kelly said, we're pleased with our inventory position.
Great and just to follow up on.
Connecting the day I think.
Your guidance.
Your implied guidance for the fourth quarter would have revenues flat to slightly down year over year down about 2%. If my math is right.
And inventory is now up a lot.
You just mentioned its core category. They shouldnt have a lot of markdown risk.
Just to connect these dots.
Was this more catch up on inventory just strategic investments because it's how comfortable where all of us to get things current investor that might might ask.
Are we concerned that we may need may have risk of discounting in the future.
How would you address those.
<unk>.
Yes, so Brad it's Kelly again, it's really the normalization of our customer payment activity right.
As we as we go from.
Returned back to kind of the 87% to 88% range plus the benefit of of the centralized decisioning that we're that we're enjoying its going to be a decline from what we've seen over the last last four quarters. So that's really the driving impact to this as you think about the impact on the top line as we continue to kind of manage the the cost of goods.
And the flow through there.
Yes.
Brian just to say it another way is we're not expecting a significant decline in the overall size of our portfolio. It's the rate at which we're renewing that portfolio each month, where the pressure will be on the top line.
Okay.
Really helpful. Thanks, everybody if I can.
Ask one more question just around.
Expenses.
Obviously 2021 has been a year, where you are growing against a year where expenses were really lean.
And Kelly can you help us get a better sense of what what Opex should grow at as we look out.
So next year any kind of a more normal environment.
Yes.
From an Opex perspective, right. The key driver there is going to be labor right.
We continue to run pretty tight alright, and not not to kind of our optimal levels I think a lot of folks in the retail environment are facing these types of challenges. So as we look forward right now Brett it's difficult to estimate the into next year, specifically, what that's going to look like through a combination of getting our stores back to normal.
<unk> levels combined with we expect to continue to see some wage pressure right.
But thats going to be a big driver next year as we as we think about guidance that we'll provide here at the next call.
One additional comment on labor if you look at the personnel increase we've experienced in this quarter versus prior year quarters. Most of that is wage rate not hours in our stores.
Really proud of what we've been able to do over the last few years of making investments to streamline our store.
Flavor cost centralized decisioning has taken a lot of the burden off of our team members in our stores and a lot of the hours that we would spend.
Sort of manually validating.
We've also put in the servicing platforms, we're now taking over 77% of our payments.
Outside of the store and so that's really saved on labor and then we've had other operational efficiencies through self service and our E. Com site that are allowing us to be more efficient and more productive in the way. We go about business. So while we expect to see.
More hours in our stores, particularly next year as payments normalized guests prepayments normalize theres more effort put into that.
We do not believe will return to historic levels of store staffing.
Great very helpful. Thank you so much.
We have another question on the phone lines from Jason Haas of Bank of America, Hey, Jason. Please go ahead.
Hi.
Great. Thanks, Good morning, and thanks for taking my questions.
The first one I wanted to ask you about is just on the cadence that you saw through the quarter. Both in terms of originations and write offs I'm curious to know.
What you saw as it relates to the child tax credit concerns you go out and then also as.
The unemployment extra unemployment insurance was stopped at the beginning of September.
Yeah, Hey, Jason It's Kelly, so I would say.
We did expect to see.
And you kind of a slowdown in customer payment activity through the course of the quarter tied to as you mentioned the end of the.
Unemployment.
Stimulus that was that was provided and that was offset to some degree by the child tax credit, but as you play through the quarter.
As we look at our lease renewal rates. It appears that there was a benefit clearly at the beginning of the quarter, but that benefit continue to tail alright, as we moved through Q3.
As we somewhat expected because again <unk> got.
Our customer as we're coming out of a very heavy stimulus stated in environment right. It wasn't just the checks that <unk> been receiving from the state and federal government. It's also.
Rent they haven't paid and other forms of assistance and received through through that period of time. So is there a wife is returning back to somewhat normal from a financial perspective, they're seeing other other challenges as well and.
We continue to see our customer payment activity normalized.
Great. Thanks, and then as a follow up question I'm curious it sounds like Youre in a pretty good position in terms of inventory all things considered so I'm curious if you're thinking about maybe potentially picking up some share maybe.
Maybe some other <unk>.
Retailers are lessons socket.
Feel like there is some opportunity there in fourth quarter and maybe even beyond.
Yes. This is Douglas Jason we definitely think it's opportunities like anytime you can have products in your stores, and particularly our customer who wants and needs of that product that day.
An advantage so I'm really happy with the fact that we've got a lot of product offer, particularly during our peak season in the fourth quarter.
Im equally as optimistic about is the inventory levels that we have in our fulfillment centers, which serve our E comm business I think we're up.
Last year's supply chain was very challenging at this time, we are up over 80% in our fulfillment centers in terms of inventory levels over last year, and we are ready for the holidays with <unk>.
Plenty on our E Com site 3000, Skus in full full warehouses, so that bodes well for the demand side of the business.
It's great to hear thank you.
As a reminder, youre asking further questions. Please press star one on your telephone keypad.
We now have next question from Bobby Griffin of Raymond James Sorry, Bobby Your line. Please go ahead when you're ready.
Thank you and good morning, everybody is doing well.
Doug Kelly I, just kind of wanted to talk maybe high level, a little bit more long term, but you guys have called out a few different times that you are tracking well ahead of the long term strategy that our plan that you outlined at the spin.
And when you think about for instance, merchandize loss ratios normalizing in the next year are they normalizing better than you would have expected when you kind of spun out and we originally talked in I guess, what I'm getting at is is the long term EBITDA guidance or target out there now maybe more conservative as we sit here and look at the business today with some.
The progress you've made.
Hey, Bobby its Kelly, what I'd say is that from that write off perspective.
We continue to expect how the same levels of write offs as 4% to 5% that we've talked about pretty consistently since.
Just kind of a pre spin roadshow right. So there's no. There's no changes there I would say, where we're really ahead as we've grown the business pretty significantly so our lease portfolio size as we go into 2022.
As well ahead of where we had anticipated.
On the.
No longer term outlook, we have provided before we're also continuing to see really good results out of Gen next right.
And so the performance in those stores are as Doug has mentioned on a few different occasions.
Exceeding our expectations, we're beating our pro forma.
And as that continues and that gives us even more confidence.
Confidence right in that longer term strategy and plan that we laid out. So those are really the kind of the key drivers as we think about being ahead of the plan from a financial performance perspective.
I'd say that from a margin standpoint, we're still kind of believe that longer term or in this 11 five to 12, 5% range. So there is no change there.
But it's really kind of accelerating the growth and the overall kind of revenue and EBITDA were going to achieve in the earlier years here.
And Bob one last thing I'd say is our centralized decisioning platform has been a huge asset for us and we continue to sort of optimize outcomes in that area and so while the four and a half Kelly exactly right, 4% to 5% we think is a.
Normalized state of our charge offs, we continue to be able to find opportunities to optimize our customer and react to market conditions, which has been a huge huge asset for us over the last 12 months.
Okay. That's helpful and Kelly just to make sure kind of I understand it's the size of the portfolio is getting to your target level quicker than you originally anticipated or is the reason the margins not potentially a little bit higher just that the labor cost are somehow somewhere else in the P&L has increased a little bit faster given our current environment I don't think anybody.
Any of us would've predict labor the way it was today.
18 months ago, or 12 months ago.
Done kind of pre roll it out of our Seo so.
While wage wages wage pressures continue to impact the business going forward right now, we're not seeing expecting it to have any material impact relative to what we were thinking kind of pre spend so it's again, it's the growth in the business, it's not changes in margins at this point.
Okay very helpful and I guess lastly, just population has.
I understand you guys will price and then the vintage of your businesses is low monthly payments. So it doesn't hit the consumer market and spread it out and that started to show up in the comp yet or is that more going to be a <unk> <unk> 2020, <unk> 2022 type benefit to comps where more products are you going to be getting repriced a little bit higher.
Monthly payments.
Bobby This is Douglas.
You do see in our revenue line and what we're writing into the portfolio higher ticket. This.
This year versus last we're probably up.
3% to 4% and ticket.
Year over year, and so that translates but remember what we write into our portfolio was only a fraction of what's in our portfolio. So the revenue we recognize as the overall portfolio is ticket versus what we're experiencing now so youll begin to see more and more of that sort of translating through to revenue in the same store revenues as we move forward.
Okay very helpful. I appreciate the detail on the 3% to 4%.
Best of luck here in <unk>.
The 2022.
Alright, Thanks, a lot.
Thank you.
No further questions. So I'll hand, it back to Douglas Lindsay.
<unk>.
Well. Thank you for joining us today are outstanding performance would not be possible without the hard work and dedication of our entire Aaron's family.
As we continue to navigate the ever changing macro environment. Our team members remain focused on continuous innovation, which I hope you heard today and delivering exceptional value and service to our customers I remain confident in the execution of our strategy and we're excited to enter our.
Peak fourth quarter season. So thank you all for joining us today have a great day.
Thank you. This does conclude today's call. Thank you all again for joining and you may now disconnect your lines.
Okay.