Q1 2022 Aaron's Company Inc Earnings Call
Good morning, My name is that against a video conference coordinator welcome to Orange Company, Inc. First quarter 2022 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'd like to turn the call over to Keith on Cook Senior Director of Corporate Affairs for Orange May begin your conference.
Thank you and good morning, everyone welcome to the Aaron's Company first quarter 2022 earnings conference call join.
Joining me. This morning are Douglas Lindsay, our Chief Executive Officer, Steve Olsen, our President and Kelly Wall, Our 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 last evening for those of you that have not it is available on the Investor Relations section of our website at Investor thought Aaron's dotcom.
During this call certain statements, we make will be forward looking including forward looking statements related to our financial performance outlook for 2022.
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.
Safe Harbor provision identifies risks that may cause actual results to differ materially from the content of our forward looking statements.
Also please see our Form 10-K for the year ended December 31, 2021, and other subsequent periodic filings with the SEC for a description of the risk related to our business that may cause actual results to differ materially from our port 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 non-GAAP , EPS and free cash flow, which had been adjusted for certain items, which may affect the comparability of our performance with other companies.
non-GAAP measures are detailed in the reconciliation tables included in our earnings release, and the supplemental investor presentation posted to our website with that I will now turn the call over to our CEO Douglas Lindsay.
Thanks, Keith Good morning, everyone and thank you for joining US today I'm pleased to report a strong start to 2022 and continued positive momentum at the Aaron's company.
In the first quarter, we delivered financial results consistent with our expectations for the quarter.
We remain on track with the 2022 outlook, we provided for the Aaron's core business and our February 23rd earnings release.
I'm proud of all of our team members in the field, our store support center and that our woodhaven manufacturing facilities.
Look hard every day to continue to innovate within our business.
Through their efforts, we were able to deliver results consistent with our expectations and to continue to invest in our strategic initiatives. Despite the challenging economic environment.
In addition, I am thrilled to report that we completed the previously announced acquisition of brands Smart USA on April one 2022.
We believe brands smart enhances our ability to execute on our mission of providing consumers with easy access to high quality products that are affordable lease and a retail purchase options.
I will share additional insights related to the brand smart acquisition. After we discuss the Aaron's core business.
Regarding the Aaron's core business, we delivered results consistent with our expectations for the quarter.
On a two year basis same store revenues were up nine 6%.
In addition, we ended the quarter with a larger lease portfolio than the same period in 2021.
Which we achieved despite volatility in consumer demand in the quarter.
Also in the quarter, we experienced expected normalization in customer payment activity, which resulted in lower lease renewal rates and higher write offs.
As we look ahead to the remainder of 2022, we are also navigating the challenging economic environment facing the market include.
Including ongoing inflationary pressures.
The uncertainty arising from geopolitical conflict and a complex supply chain.
Despite the volatile economic environment.
Remain confident in our outlook for the year and our ability to optimize performance using the many levers inherent in our direct to consumer model.
We believe our customer value proposition is compelling and gives us a competitive advantage.
Over the last several years, we have significantly transformed the Aaron's core business with the goal of continuing to provide an exceptional customer and team member experience, while also driving greater productivity in our operating model.
To achieve this transformation, we made significant investments in promoting the aaron's value proposition.
Digitizing all aspects of the customer lifecycle.
And optimizing our store footprint.
As a result, our brand awareness in the first quarter reached the highest level since 2018.
Our enhanced e-commerce platform continues to grow attracting new and younger customer.
Our digital payment platforms offer increasing flexibility and convenience to our customers.
Our centralized decisioning platform enables an increasingly predictable lease portfolio.
And our more than 135 Gen next stores continue to outperform our legacy stores.
I'd like to expand further on a few of these growth initiatives first our fast growing E. Commerce channel remains a key revenue driver and an area of strategic focus.
With E Commerce revenues, representing 15, 4% of lease revenues in the first quarter.
This is the largest contribution of ecommerce revenues to total lease revenues since launching Aaron's dotcom.
We are attracting more customers to our website improving conversion rates and enhancing the customer experience.
We more than doubled our online product assortment in the last year.
And importantly, we have meaningfully accelerated the speed with which we are able to introduce new products to our E Commerce channel.
We expect to leverage these capabilities to drive growth in our business by expanding our marketplace offering a broader product catalog to our aaron's lease to own customers.
Complementing our investment in digital channels are Gen. Next store concept continues to deliver a superior customer experience and drive meaningful financial performance.
In the first quarter of 2022 lease originations in our Gen. Next stores opened less than one year continue to grow at a rate of more than 20 percentage points higher than our average legacy stores.
Following the opening of 19, new Gen next locations in the first quarter.
Our 135 company operated Gen next stores accounted for more than 13% of lease and retail revenues.
We remain committed to the generic strategy and currently plan to add more than 80 additional Gen next stores this year.
For a total of approximately 100 <unk> locations in 2022.
We continue to innovate here at Aaron's and the business transformations, we have implemented are yielding great results.
We're excited to apply the assets and capabilities, we have built to our newest platform for accelerated growth brand smart USA.
As discussed on our last earnings call. We believe the acquisition of brands Mark will provide meaningful value creation opportunities.
We continue to expect this transaction to deliver a variety of strategic and financial benefits.
It broadens our customer reach and significantly expands our total addressable market.
It Leverages <unk> strengths to create an in house lease to own solution.
It significantly increases the product assortment available to Aaron's customers.
And the transaction also yield significant purchasing power and cost synergies.
We are operating Aaron's and brands Mart as separate lines of business each operating under their current brand.
The brands Smart business reports under our President Steve Olsen.
Steve and his team are already hard at work integrating brand smart and of the Aaron's family and executing on our strategic initiatives.
Our initial efforts are focused on capturing the synergies for the transaction as well as making investments in the brand smart business to position it for future growth and to enable it to operate effectively as part of a public company.
We have already begun work on the implementation of an in house lease to own solution for brands smart customers, which.
Which we expect to launch in the second quarter of this year.
We are also preparing to add some of the brands smart product catalog to Aaron's dot com by the end of the year.
And are beginning to assess procurement synergies between the two businesses.
Finally, we have begun assessing optimal locations for new brand smart stores with the intent of opening one to two stores per year beginning in 2023.
This is an exciting time for our company as we have new opportunities to drive long term value for shareholders create opportunities for our team members and enhance our compelling value proposition.
We continue to expect the combined company to deliver more than $3 billion in total annual revenues of more than $300 million and adjusted EBITDA by 2026.
We look forward to reporting brands Mart's second quarter performance in our next quarterly earnings release.
Before I turn the call over to Kelly, Let me reiterate how pleased I am with the progress we're making on our strategic initiatives for both our Aaron's core business and brand smart.
I remain confident we have the right team the right strategy and the right platforms to deliver long term growth for all of our stakeholders.
With that I'll now turn the call over to Kelly wall to discuss the details of our first quarter results and 2022 outlook.
Thank you Douglas before I share our financial results for the quarter I want to remind you that the financial and operating results for the first quarter of 2022.
And prior periods do not include <unk> at.
As Douglas noted the acquisition closed on April one 2022 and results for <unk> will be included in the company's consolidated financial statements beginning in the second quarter of 2022.
With that said I am pleased to share the financial results for the Aaron's core business for the first quarter of 2022.
Total revenues in the quarter were $456 $1 million.
Compared with $481 1 million for the first quarter of 2021 a.
A decrease of five 2%.
This decrease in total revenues was primarily due to lower lease revenues attributed to the expected normalization of the lease renewal rate and lower exercise of early purchase options by our customers.
These were partially offset by the increased size of our lease portfolio year over year.
More specifically.
The company ended the first quarter with our lease portfolio size for all company operated stores of $131 7 million.
An increase of two 3% compared to our lease portfolio size of $128 8 million on March 31 2021.
Lease revenues in the first quarter also benefited from an increase in average monthly rent per agreement.
Which is partially offsetting lower customer delivery volume.
To help offset the continuing high inflation, we are experiencing in the cost of lease merchandise, we continue to adjust product lease rates and modify the product assortment mix offered to our customers.
The same factors that have impacted lease revenues also contributed to a four 3% decline in same store revenues for the first quarter of 2022.
Compared to the 14, 8% increase in the prior year quarter.
On a two year basis same store revenues were up nine 6%.
In the first quarter of this year, our customer lease renewal rate was 89, 4% for all company operated stores compared to 92, 5% and the government stimulus aided first quarter of 2021.
We have discussed the benefits to our customers from government stimulus programs on prior earnings calls.
And as we continue to comp over stimulus aided periods. We expect that this normalization will continue to result in lower customer lease renewal rates and lower customer demand when compared to the same prior year periods.
As Douglas highlighted we continue to experience strong performance in our E Commerce origination channel.
E Comm revenues grew three 9% in the first quarter of 2022 after increasing 41, 9% in the same quarter of the prior year.
E. Commerce also has continued to represent an increasing percentage of our total lease revenues increasing to 15, 4% in the first quarter of 2022 from 14, 3% in 2021.
At the end of the quarter, we had 135 company operated Gen next locations.
These stores contributed 13, 2% of lease and retail revenues in the first quarter up from five 2% in the first quarter last year.
We plan to open a total of approximately 100 and <unk> locations in 2022.
Due to the continued challenges in the global supply chain, we have delayed 20 of the previously communicated planned Gen next locations into 2023.
With this change we currently expect to have 215 Gen next locations by year end.
Which will represent approximately 20% of our company operated stores.
In addition, our Gen next stores are generating favorable revenues and earnings growth when compared to our legacy stores and are continuing to meet our internal expectations.
With lease originations and Gen next stores opened less than one year continuing to grow at a rate of more than 20 percentage points higher than our average legacy stores in the first quarter of 2022.
Turning to our operating expenses for the first quarter.
Personnel costs declined $3 $8 million in the first quarter as compared to the prior year, primarily due to lower performance based incentive compensation.
Partially offset by higher wages for in store team members.
Similar to the fourth quarter of 2022 staffing levels in the first quarter at our stores remain below our operational targets due to the ongoing challenges in the U S labor market for retail based hourly employees.
Excluding restructuring expenses spin related costs and acquisition related costs total other operating expenses declined $4 million in the quarter as compared to the prior year period.
This decrease is primarily due to lower advertising costs, partially offset by higher occupancy costs shipping and handling and other miscellaneous expenses.
The increase in occupancy cost is attributed to higher store maintenance and utility costs and the rent and lease hold improvement depreciation related to our new Gen next format stores.
The provision for lease merchandise write offs as a percentage of lease revenues and fees for the first quarter was five 4%.
Compared to three 1% in the prior year period.
As expected this increase in write offs was primarily due to lower customer payment activity. This year as compared to the government stimulus aided first half of 2021, where lease renewal rates were 300 to 400 basis points higher than what we experienced pre pandemic.
And the continued product cost increases and our lease merchandise.
We also believe that the current macroeconomic conditions and especially the high inflation our customers are facing have impacted payment activity.
Adjusted EBITDA in the first quarter of 2022 was $54 $7 million compared with $73 9 million for the same period in 2021.
As a percentage of total revenues adjusted EBITDA was 12% compared to 15, 4% last year.
The decline in adjusted EBITDA and adjusted EBITDA margin was primarily due to the expected lower lease renewal rates and expected higher provision for lease merchandise write offs compared to the government stimulus aided levels in the first quarter of 2021.
On a non-GAAP basis diluted earnings per share were <unk> 87, compared with non-GAAP diluted earnings per share of $1 24 for the same quarter in 2021.
Free cash flow was $10 7 million, an increase of $16 $6 million year over year, primarily due to lower purchases of lease merchandise sale.
Sale and leaseback transactions for three company owned stores and lower capital expenditures in the current year quarter.
For the year to date period ended April 20, <unk>. The company has repurchased 516000 shares of the company's common stock for approximately $11 million.
On March 3rd 2022, the company's board of directors increased the share repurchase authorization to $250 million from the original $150 million plan and extended the maturity to December 31 2024.
The remaining authority under the new share repurchase plan is $135 8 million.
Additionally on April five 2022, the company paid a quarterly cash dividend of 11 <unk> per share.
This is an increase of 12, 5% from the previous quarterly cash dividend of <unk> 10 per share.
As I stated previously we closed the acquisition of brands Mark on April one 2022.
In connection with the transaction, we replaced the existing $250 million unsecured revolving credit facility with a new credit facility that includes an unsecured $375 million revolving credit facility and a five year $175 million unsecured term loan.
As of April one the consolidated company had $121 2 million of borrowings outstanding under its revolving credit facility.
Including cash on hand, our total available liquidity was approximately $260 million at closing.
Which included $237 million available under our unsecured revolving credit facility.
Turning to our outlook, we have updated our full year 2022 outlook to reflect the acquisition of <unk>.
This updated annual outlook includes nine months of financial results for the acquisition.
We expect total consolidated revenues of between $2, three 2 billion and $2 $3 9 billion and.
And consolidated adjusted EBITDA of between $200 million and $215 million.
We also expect consolidated non-GAAP diluted earnings per share of between $2 65.
To $2 90 per share.
Consolidated capital expenditures of $100 million to $125 million and consolidated free cash flow of 45 million to $55 million. Additionally.
Additionally, we are assuming an effective tax rate of 26% and the diluted weighted average share count of 32 million shares.
We have not assumed any additional share repurchases in 2022 for purposes of this outlook.
Excluding the brand Smart acquisition, the Aaron's core business annual outlook for total revenues adjusted EBITDA and annual same store revenues remains consistent with the outlook provided on our fourth quarter 2021 earnings call.
For <unk>, we expect revenues of between $545 million and $565 million and.
At EBITDA of between 20 million and $25 million for the nine months 2022 period post acquisition.
As Douglas discussed earlier on this call. The addition of brands Mart is expected to provide many strategic and financial benefits and we believe the transaction has significant synergy opportunities.
More specifically.
We believe that the in house Lts synergy will provide approximately $15 million to $20 million of annual run rate EBITDA by the end of 2024 and the increase in product assortment provided to the Aaron's customers and procurement opportunities will provide synergies of approximately $5 million and 10 million.
Respectively.
We are also investing in people process improvement and technology to position brands Mark for growth and to operate this business as a segment of a public company.
We expect this incremental expense to be approximately $10 million annually.
Net of these incremental investments we are forecasting annual net run rate synergies of $20 million to $25 million by the end of 2024.
Which we expect to double by the end of 2026.
When combined with our existing E Commerce and Gen next growth platforms at Aaron's, we continue to believe that the consolidated business will deliver total revenues of over $3 billion.
And adjusted EBITDA greater than $300 million.
By 2026.
With that I'll now turn the call over to the operator, who will assist with your questions.
Thank you for our Q&A, if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two.
When preparing to ask your question. Please ensure your friends on mute to Potently.
Our first question today comes from Bobby Griffin from Raymond James Your line is open.
Good morning, everybody. Thank you for taking my questions.
Yes Bruce.
Hello, everybody.
Everybody does I appreciate the detail on the renewal rates just curious did that move around a lot during the quarter or are we kind of now at the level of around 89% that you feel is the new baseline for the business given all the work you've done with centralized decisioning and some of that stuff.
Yes, Bobby as you recall from previous calls.
Renewal rates have strengthened over the last year and a half with stimulus in the economy, our historic renewal rates are.
Call it in the 87% to 88% range.
At the end of 2020 was stimulus coming in the increased by about two to 300 basis points in the first half of 2021. They were up three to 400 basis points. So that's where we're comping over now. So this normalization is really as expected and as we look forward the renewal rates were normalized.
As expected going into the year. So what's reflected in our guidance is really consistent with.
What we have seen this normalization as the.
The government stimulus is coming out is really nothing different than.
What we had articulated on our last call.
So just to set another way to make sure I understand how <unk> played out through 2022 played out the way. The 89 ish percent is played out kind of as you expected and thats what that type of rate as what's assumed in the go forward as well, 89% or so rough numbers, yeah, well, it's important to realize that we are a seasonal business. So.
It was expected in Q1 as you know tax seasons in Q1, but it was as we expected and then.
We believe we will still be comping negative to last year in Q2, because of the stimulus aided Q2 last year, but still normalizing down we believe as we get into Q3 and Q4 those will be closer to historic levels seasonally adjusted for those two quarters.
Perfect. That's very helpful and I guess two questions two follow up questions on some of the detail on brand smart one.
No I was little surprised you guys mentioned the synergies for the in house <unk> solution, but called out the run rate probably by the end of 2024.
Can you just unpack that timing I would've thought that would've came a little bit sooner given that's one of the biggest synergy buckets.
A large compelling opportunities there just some investments that have to be made there to kind of get that up and running or anything else to help us understand some of the behind the scene work that has to take place to get the in house leasing solutions and brands Mark.
Yeah, Hey, Bobby it's Kelly happy to unpack that a little bit for you. So.
As we are kind of integrating this business and focusing on.
Standing up the in house lease to own.
Product there remember, it's a portfolio based business. So day, one we will have a few agreements and then it will grow over time right and in the first quarter will recognize less than a full year run rate of revenue and EBITDA contribution associated with that so.
As the portfolio size increases through that through that business. We would expect that the contribution on an annual basis would grow over time and you're right. We do have some upfront investments that we need to make we're obviously leveraging our existing.
Decisioning technology, our expertise around reverse logistics as well as.
Infrastructure and Knowhow that we have across the organization that we believe will help us stand this up fairly quickly, but again the portfolio nature of the product is is what's kind of leading to that ramp over time.
Makes sense and then I guess lastly, I mean, there's a lot of fear out there on big ticket home durable spending altogether kind of right now as we go over some really tough comparisons in housing turnover in Mexico slowed grades.
Great to see the portfolio size outlook can you maybe give us some more color on now that you have brands Mark as well kind of how their business has trended over the last couple of months have you seen any type of behavior from customers that would show you trade downs happening there's anything there to help us maybe get a better sense of where the consumer and your customer is today.
Sure Hey, Bobby this is Steve I'd be glad to answer that so I'm going to first start a little bit will give you a background on the category mix of the brand smart business. So.
Their business is obviously weighted more to appliances and that ranging at about 50% of their of their mix followed by consumer electronics around 25 computers around eight and.
Furniture and other categories in the low single digits.
As Douglas mentioned and Kelly mentioned in their prepared remarks absolute <unk> is comping over.
Stimulus hated periods. The last couple of years, but they continue to see nice growth.
And average selling price.
Across across their category so.
The benefit of brand smart.
Their broad assortment with our compelling value proposition is.
Is supported by their by their by their knowledgeable sales force that allows them to talk to the customer inside the store and get them to understand the benefits of trade up features and functions in each product. So they're doing doing that on a daily basis and I believe that is supporting what I see through Q1 is a continued growth in our average selling.
Yeah, Bob the other thing I'd say on the demand side. So we're Brian <unk> as expected normalizing, but we're seeing strength in categories as Steve mentioned and particularly in margin and we will report on that in Q2 as we move forward in the business in terms of the Aaron's customer.
The demand environment is normalized as expected I did note in my comments that there was some volatility during the quarter as you know we had a very strong.
And Q4 of last year inventory was in great position in our sales were very strong in the holiday season. As we went into January as you know there is a resurgence of COVID-19 .
And that sort of impacted us through mid February started as tax season came upon us sort of after the Valentine's day period, we saw real strength in demand and that persisted all the way through the end of March so.
So the consumer I would say theres a lot of volatility out there.
One thing I'm really happy about is our E. Commerce business has remained strong all the way through that so we've got very strong comps and E. Comm revenues up $3 six over last year up 41%. So it's.
Real strength of ours, and so we continue to monitor that as we look forward, Steve mentioned sort of price and what was the customer paying the price that we're offering I'm happy to also say that we've been able to drive average ticket with our consumer average ticket at the Aaron's business is up 6% year over year, and we've been able to.
<unk> offset price increases that we've seen with higher ticket and preserving margin in the Aaron's business, which is really good now that's not to say that our customer is under pressure.
<unk>.
Serve credit challenged customer who has cost increases in all aspects of their business, but we believe that the decisioning algorithms. We have set us up for a success as we move forward in the renewal rates are as I've communicated earlier, so I'm really pleased with the way the business is performing.
Thank you I appreciate all the detail very helpful. Congrats on the strong quarter versus tough compares and getting brand smart close look forward to seeing what you guys do with the business.
Great. Thank you.
We now move on to Jason Haas from Bank of America. Your line is open.
Hey, good morning, and thanks for taking my questions.
The first one is on write offs I'm curious I think on the last call we had talked about write offs.
Getting better throughout the year I know that the typical seasonal cadence as they do tend to pick up through the year or is that customer runs through their liquidity. So I'm curious if that sort of expectation for write offs to come down through the year and then I'm just trying to reconcile that with.
The lease renewal rates, which are supposed to get.
I guess lower through the year. So I'm just trying to understand those two dynamics since they seem to be kind of moving in different directions.
Yeah, Hey, Jason It's Kelly so on the write off side.
You are right, we had called out on our prior call that.
Write offs would be higher in the first quarter than what we had seen last year and higher than what we had seen kind of historically on a.
Kind of seasonally adjusted basis right. So.
Just to remind you we came in at five 4% for the quarter. That's up from three 1% last year and we think that this increase has been driven by a few things one the anticipated normalization and the customer activity that we've seen customer payment activity that we've seen.
We've also and Douglas illness briefly there was a delay in the tax season.
That impacted that.
That plus the normalization impacted lease revenues for the quarter as well as charge offs to charge offs were up.
Other thing that was impacting charge offs in the quarter or the higher net book value of the lease merchandise again, that's been up year over year due to the inflationary pressure that we're seeing.
Refined product that kind of going forward now as we look at that and we think about the rest of the year. We do continue to feel like we're going to we're going to land in that annual range that we've talked about before of 4% to 5%, albeit at the high end again consistent with what we were thinking when we put out our original plan for the year last quarter.
The seasonality is a bit different this year, we've talked about that some as well with typically Q1 would be your lowest period, it's going to be at the high end of our four quarters. This year.
And we would typically see some improvement and increased in Q3, and then Q4.
To be kind of right around Q3 as well so.
We're starting to get back to a more normal cadence at least that's what we're planning for but again, we are paying very close attention to this because some of the things that we're facing right now we haven't seen in over a decade, but again I want to reiterate we feel good about that kind of coming in on an annual basis at the high end of that 4% to 5% range.
Yes, Jason as Douglas as that relates to our lease renewal rates and I may have omitted. This in my comments to Bobby and we are seeing normalization, particularly in the second half of the year kind of Comping.
Pre pandemic normalization, albeit at a higher rate than pre pandemic levels. I think we've previously communicated 100 basis points higher than pre pandemic levels. So we see that normalizing the settling in above pre pandemic levels, which kind of correlates with R.
Write off guidance and Thats because of our Decisioning algorithms. We've put in place. We now have over 90 plus percent of our network being decision through centralized decisioning and we have a lot of a lot of levers and a lot of predictability in the portfolio.
Thanks, that's helpful color and then for a follow up a.
<unk> related to a question Bob just on the brand smart revenue and EBIT guidance for 2022, I'm trying to reconcile that with the numbers that you gave for 2021, which were.
I know I'm comparing for quarters to three quarters, but it does seem like if I try to adjust for seasonality I don't know the exact seasonality of branch market. It does seem like it's a step down I think on the EBIT side, you talked about I think the $10 million of public company costs and it sounds like maybe on the revenue side Youre lapping over some stimulus comparison, but I'm just curious if you could provide any more color on just.
How 2022 revenue and margins for <unk> compared to 2021.
Yeah, Hey, Jason It's Kelly so.
Youre spot on.
That we provided a range of $20 million to $25 million on the EBITDA that is the last nine months of the year. So.
So if we kind of start there and level set.
Last nine months of 2021.
Brand smart and those nine months.
They delivered about $39 million of EBITDA and so from there.
$10 million of investments that I didn't talk about that's an annual number. That's also net of kind of adding back. Some one time investments that we're making along the way.
So as we think about what that net number is going to look like for this year. It would be about $7 million of investments and again that's in people at both the store and in the store support center as well as investments in process and technology.
As we look to set the company up to deliver consistent growth going forward as well as quite frankly to operate it as a segment of a public company.
We're also looking to bring their staffing levels back up to what to where they were at pre pandemic.
Likely not all the way back up but we do think it's important.
To invest back into the stores are in terms of labor in the stores. We're also seeing increases in just other store related opex kind of a more inflationary kind of driven things outside of just the cost of product that we're selling and in the remainder of that would be normalization.
From from last year into this year as we see the demand trends slightly lower yes.
And I just mentioned those demand trends are lower over 2000, and inflated 2021 year.
I mean, when you look at our two and three year performance in that business. It's been very strong and we believe the markets that we're serving in Florida, and Georgia are very strong markets and so.
Just generally I would say excuse me the integration is going very well and we're super optimistic about the business looking forward.
It's great to hear thank you.
We now move to Kyle Joseph from Jefferies. Please go ahead.
Hey, good morning, guys. Thanks for having me on an answering my questions.
Just one follow up on brand smart for modeling as we incorporate it into our models as for kind of the expense breakdown give us a sense for.
Gross profit margins at that at that business.
Yes.
This is Steve I'll be glad to answer that so.
Ill relate back to the category mix so.
Honestly when you look at the.
The weight of appliances in their business relative to other retailers in the market.
Youre going to see gross margins in.
Like call it 21 to 22, 2% range.
And that is obviously off the benefit of having appliances at that 50% range in consumer electronics.
Slightly lower than other players.
Yeah.
Okay.
Okay.
One thing I'd say is we're trending as the shift mixes in our product categories that margin will mix, we've seen real strength.
In appliances in that business and we'll continue to add new products into that business and more as Steve gets a hold of it and as merchandising team and as we work with a very talented <unk> team and more of our mix those profiles will change, but we will give you more detail about that as we move forward in the business.
Got it I appreciate that and then.
A lot going on in the World and everything can you just give us a sense for kind of the cadence of both the comp as well as write offs through the first quarter and kind of into April and when you really saw tax refunds start rehab and how that impact and then admittedly there was omicron and Theres just a lot going on but just give us a.
Sense for the cadence of both the comp and write offs during the quarter and kind of since the quarter.
Yes, sure I mean I think.
I mentioned a little bit.
Marissa Bobby.
The year strong last year in January we sold this early resurgence of omicron, obviously, our demand soften during that time as we.
Not only customers not visiting our stores, but employees out.
That came back mid February as we saw a delayed tax season, albeit a tax season that showed up ultimately strengthening through the month with great strength in the month of March.
In the quarter that being said our store business was down year over year, we were comping, a very strong sales quarter last year.
But all during that time, our E. Comm business was very strong comping, a huge comp last year.
And so we're really happy about that as we ended the quarter and ended.
April .
Continue to see strength in our E com business, but.
But we continue to see volatility in the store business and Choppiness, we continue to monitor it but fortunately we have a lot of levers in our business to be able to offset that we're doing things on the promotional side.
And certainly able to control what we can control there. So as we look at the outlook going forward in our revenue outlook remains the same it's.
On slightly softer demand with slightly higher ticket still saying within the annual range that we.
<unk> and as I mentioned earlier.
Big part of our revenue because of our portfolio of business is not just the size of the portfolio and the quality of the portfolio and we believe renewal rates are normalizing, albeit at higher than pre pandemic levels. So that gives us confidence in reiterating our guidance for the year.
Got it very helpful. And then just one last one from me kind of post brand Smart how are you guys thinking about it.
Have any sort of target leverage and then kind of update us on your capital allocation priorities. It sounds like Youre planning kind of a mix of new store builds between <unk> and brand smart, but just update us on capital allocation priorities.
Hey, Kyle it's Kelly so.
I'd start with our capital allocation priorities really they remain unchanged.
What we've talked about in the past, we're going to continue to focus on investing in both of our businesses to drive revenue and earnings.
We were excited that we now have three platforms for growth going forward. Obviously, our gen next repositioning our remodeling program that's ongoing at the at the air on the <unk> side as well as new E com growth with both businesses.
And then last and certainly not least right is the <unk> acquisition, where we're expecting growth to come not only from the synergies that we've outlined but also as we move into 2023 and beyond opening new stores. So so we're going to continue to focus primarily there and as long as we're seeing returns where are we.
We would expect them to be we'll make investments across all those three platforms and.
And in second and third right looking at M&A as it makes sense as well as returning any excess capital to shareholders. I mean, clearly we're very focused from an M&A perspective on integrating.
This acquisition that we just completed in terms of closing closing it. So we're hard at work there.
So again, the focus will primarily be on as we have excess capital.
Turning that back to back to shareholders as it makes sense from an overall kind of capital structure perspective.
I'd say longer term, we'd want to operate the business.
It's consistently at less than one five turns of net debt divided by adjusted EBITDA.
Pro forma for this transaction were around.
One turn of leverage and.
And we would expect with some free cash flow to potentially lower that going forward, but at the same time as we have opportunities to invest in these businesses.
We will.
Utilize that capital to do their due so they're appropriately also.
Great. Thanks, very much for answering all my questions.
Thanks, Joe.
We now turn to Anthony <unk> from loop capital markets. Your line is open.
Good morning, Thanks for taking my question first question just a quick housekeeping question.
Sure.
Store Count for company operated stores, and then franchise stores at the end of the first quarter.
Yeah, So hey, Anthony it's Kelly at the end of the first quarter. We had 1070 company owned stores our company operated stores and in 236 franchise operated stores for a total of 1306 stores across the franchise here.
Got it that's helpful I think.
135 of those stores are in new Gen next format stores.
Got it and then just real quick.
Yes.
I guess on supply chain.
We are a headwind for us.
A number of retailers.
Last year it seemed like you guys fared better than most.
Just to get an update there.
Headwind at all.
Our first quarter results.
Sure Hey, Anthony this is Steve would be glad to answer that as Douglas mentioned in his prepared remarks, we feel we're in a really strong inventory position coming out of Q1 across all of our major categories and that's just the result of all the hard work, both the merchandising and supply chain teams within the Aaron's business.
As well as the <unk> business, just setting themselves up.
The right inventory in the right place.
I think just generally.
Got to learn to live in this new supply chain environment, and that's just about building in the correct lead times.
And safety stock to run the business and I really believe we've done that through all the hard work. The team has done over the last quarter.
Got it Thats helpful.
Sure.
Thank you.
We now turn to Bill Chappell from choice.
Please go ahead.
Yes.
Thanks, Good morning.
Can you I guess.
Talk a little bit more on the supply side is statistically it kind of brand smart.
Appliances are still tough to find and I, just don't know if theres a way to quantify how much.
It hurt.
<unk> negatively impacted sales for ran smart last year, if you see some kind of.
Window opening up in the next six months, where appliances in particular, but all things well.
We will start to.
Be more full stores more full full sales or if it didn't have that much of an impact compared to other retailers.
Sure I'll be glad to talk this is Steve again, I'd be glad to talk about some of the general trends that we've seen.
<unk> seen exceeding their business so.
<unk>.
<unk> today coming out of Q1.
Coming out the at the close of the acquisition. Obviously is in is in a strong.
Inventory position across all the categories and most importantly in their appliance business they've got great.
Supplier partners.
And they have a very broad assortment it to put it in a range over 180 refrigerators 70 <unk>.
Laundry payers and <unk>.
Close to 200 ranges. So what that gives them is the ability to always have an offering from the low end to the high end.
I can't speak specifically about any details maybe they may have seen last year.
But assuming maybe there were minor holds in the assortment, but having that broad assortment allows them to trade and have the appropriate items at every price point.
The customer.
Their business continues to perform well in appliances.
They had positive results.
And they're in their Q1 business and we believe looking forward that from an inventory perspective.
We'll continue to watch it closely but but hopefully will be it will continue to be in a strong position.
Well I guess.
With that answer just so do you think <unk> got a boost last year by having.
Available product that it may.
As other retailers start to.
You get inventory or a wider selection of inventory because I mean, clearly appliances are short a lot of places. So I'm just trying to understand was that a net benefit it sounds like for for brand smart by just having availability.
Yeah, Hey, Bill, it's Douglas I mean listen as Steve mentioned, we've got very talented buyers down there.
So as a merchant driven culture, they're scrappy and I would say much like the Aaron's business, we did a great job of it.
Making sure inventory was in stock during some of the more challenging periods global supply chain issues and I think they did the same we're not going to directly comment on their performance last year, but as Steve said, they've done a really nice job.
And we continue to see strength in appliances, there will unpack brand smart a bit more in the second quarter as we report there.
Our performance next quarter.
Got it and then just.
Last one for me.
Understanding the brands part seasonality is that is there any way for optically is thinking up kind of percentage of revenue for the year on third quarter versus fourth quarter or is it pretty heavily fourth quarter similar to kind of Aaron's.
Yes.
Typically most retailers are heavier fourth quarter.
But I think what we're trying to really get our hands around as we integrate this business and the same way that we have.
<unk> acknowledged that the seasonality for 2022 for Aaron's is.
A bit different than a typical year, we may see similar trends at at brand smart as well so right.
Right now we're not prepared to comment.
Specifically on seasonality in quarter to quarter trends, but we do expect to unpack that a bit more going forward.
What I'd say on that just as Kevin over the top.
The seasonality in brands smart will be different than the seasonality at Aaron's.
Aaron's is our recurring leasing business recurring revenue.
It's impacted by liquidity other customers per season brand smart as more as a retail business that will perform.
More similarly to traditional retailers. So you can look to that as a guide.
Got it thanks, so much.
Great. Thank you.
We have no further questions I'll now hand back to Douglas Lindsay CEO for closing remarks.
Okay. Thank you for joining us today as we continue to navigate a challenging.
Challenging macroeconomic environment, we're pleased that we've delivered financial performance consistent with our expectations for the quarter.
Our team members remain focused on delivering exceptional value and service to our customers and we're investing in our strategic initiatives both at the Aaron's core business and the brand smart.
We believe we're well positioned to create long term value for all of our stakeholders and look forward to reporting the consolidated results of both Aaron's and brand Smart next quarter.
Thank you again for being with US today, and we look forward to speaking with you soon.
Today's call is now concluded wed like to thank you for your participation you may now disconnect your lines.
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