Q3 2022 Aaron's Company Inc Earnings Call
Hello, everyone and welcome to the Orange Company Q3 earnings call. We will begin in one minute time it'd be about twice your question ready for the Q&A. Please press star followed by one on your telephone keypad. Thank you for your patience.
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Hello, everyone and welcome to the Irons Company Q3 earnings call. My name is sharlene and I'll be coordinating the call today, you'll have the opportunity to ask a question at the end of the presentation if you'd like to register your question. Please press star followed by one on your telephone keypad, but I'll hand over to your host Keith Hancock Senior director of corporate Affairs.
To begin Keith Please go ahead.
Thank you and good morning, everyone welcome to the Aaron's Company third quarter 2022 earnings Conference call.
Joining me. This morning are Douglas Lindsay, our Chief Executive Officer, Steve Olsen, our President and Kelly Wall, Our Chief Financial Officer.
After our review of the third quarter, we will open the call for questions.
Many of you have already seen a copy of our earnings release issued yesterday afternoon for those of you who have not it is available on the Investor Relations section of our website at Investor thought Aaron's dotcom.
With our third quarter release, we are updating our reporting format. The simple pocketbook provides an efficient and easy comparison of important metrics against previous quarters and includes additional commentary about our result.
Our accompanying Powerpoint presentation also available on the website.
Also focused on results from the third quarter.
During today's call certain statements, we make will be forward looking including those related to our financial performance outlook for the remainder of 2022. Please.
Please refer 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.
Please see our Form 10-K for the year ended December 31, 2021, and the 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 refer to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA.
non-GAAP net earnings non-GAAP, EPS and free cash flow, 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, and the supplemental investor presentation posted on our website.
Now please welcome the Aaron's company CEO Douglas Lindsay to share more about our third quarter results Douglas.
Good morning, everyone. Thank you for joining us and for your interest in the Aaron's company today. We're pleased to report our consolidated company results for the third quarter of 2022.
Which closed on September 30th.
This quarter, we delivered solid results for both revenues and adjusted earnings in what remains a challenging economic environment.
And as a result, we are raising the midpoint of the full year 2022 guidance, we provided on July 25th.
Within the Aaron's business segment high inflation continues to impact our core customer.
While gas prices fell during the quarter food and housing costs remain high.
Despite these headwinds merchandise deliveries to our customers steadily improved during the quarter.
Resulting in revenue and earnings for the Aaron's business coming in line with our expectations.
Our third quarter performance benefited from ongoing investments in lease Decisioning and digital payment and servicing platforms.
As well as continued investments in our key growth strategies.
<unk> Aaron's dotcom and our Gen next door program.
These platforms give our customers increased flexibility and where and how they shop, either online or in a beautiful Aaron's store.
Meanwhile, we remain focused on driving efficiencies in our cost structure.
And leveraging our data analytics and technology platforms to drive profitability.
We're also executing on our previously announced real estate repositioning and optimization program.
And this quarter initiated a new plan to further reduce expenses.
Turning to brand smart.
We continue to be pleased with this acquisition.
<unk> USA as the low price leader and retailer of choice for appliances and consumer electronics in the markets we serve.
We believe our competitive position in both price and selection as a meaningful differentiator in attracting new and repeat customers from across the credit spectrum.
In the third quarter brand smart once again performed at a high level with the product sales in the ecommerce channel performance, surpassing our internal expectations.
Moving forward, we remain confident in brand sports growth potential and optimistic about capturing the synergies announced at the time of the acquisition.
In particular, we are excited to open our first new brands of our store in 2023.
Finally, I want to thank all of our team members of both Aaron's and brands more for helping us deliver positive results this quarter.
And for remaining focused on our key initiatives.
Together with our strong balance sheet and liquidity, we believe our focus on innovation in both businesses enables us to deliver our market leading value proposition to a large and diversified customer base, while positioning us for future growth.
Before I turn the call over to our President Steve Olson I want to particularly recognize the hard work and dedication of our teams are responding to hurricane Ian.
Through their efforts, we were able to ensure the safety and security of all impacted team members and to reopen our stores critically.
I will now turn the call over to Steve.
Thank you Douglas.
Second your remarks, and thanking all of our team members across Aaron's brand smart in Woodhaven.
Your focus and commitment on customer service continued innovation and winning in the marketplace is truly outstanding.
I am proud to be a part of this team and I look forward to working with you and growing our business.
Now turning to the performance of the Aaron's business segment.
As Douglas mentioned, our customers continue to face challenges due to inflationary and other economic pressures.
Despite these headwinds the Aaron's business still delivered third quarter results in line with our expectations.
As expected, we continued to see softening in our leasing no rate higher.
Higher lease merchandise returns and increased charge offs.
In the quarter, our customer lease renewal rate was 86, 3% for all company operated Aaron's stores, which was down 340 basis points from the prior year quarter and below pre pandemic averages.
Kelly will discuss our lease merchandise returns and charge offs in a few minutes.
We continue to respond to these challenging trends by focusing on preserving profitability through tightening our lease decisioning algorithms.
Leveraging our enhanced digital servicing platforms and executing our lease renewal strategies.
In the quarter.
Customer demand was stronger than expected.
We attribute this positive trend to well executed strategies across our store and e-commerce channels.
Also our lease portfolio size for our company operated stores ended the third quarter slightly ahead of our internal expectations at $125 8 million a.
Greece, a four 8% as compared to the prior year quarter.
Shifting to our growth strategies within the Aaron's business, we were pleased to see positive sustained momentum in e-commerce and <unk> stores.
These important channels contributed more than one third of our total Aaron's business revenue in the third quarter.
E Commerce remains a key customer acquisition channel and revenue growth driver for the Aaron's business.
The performance of our ecommerce channel was outstanding in the third quarter because of our dynamic digital marketing strategies further improvements in the online shopping experience and an expanded product assortment.
More and more customers are shopping with us at Aaron's dotcom, resulting in increased website traffic and higher conversion rate as compared to the prior year quarter.
Due to our digital marketing strategies and the strong performance of our E. Commerce team, we continue to increase the sales volume through this important channel.
Recurring revenue written into the portfolio for E Commerce lease originations increased 24% compared to the prior year quarter, while total E Commerce revenues increased 11, 1% year over year.
Furthermore, the e-commerce business represents an increasingly higher percentage of our total lease revenues.
In the third quarter E Commerce represented 16% of our total lease revenues up from 14, 2% in the prior year.
Now turning toward Gen X strategy, which is continuing to deliver meaningful financial results.
We believe our Jan next doors and teams.
Best customer experience in the industry through a larger brighter and easier to navigate showrooms that offer an expanded product assortment.
In the quarter, we continue to see lease originations and Genex stores opened less than one year grow at a rate of more than 20% higher than our average legacy stores.
These stores now account for more than 22% of revenues up from eight 5% in the third quarter last year.
I'm also excited to announce that we opened our 200 next door and Flint, Michigan earlier this month and.
In the quarter, we opened 24 Jai next doors and remain on track to open a total of 100, new Gen X locations in 2022.
We are committed to this important real estate optimization strategy and plan to open additional Gen next locations in 2023.
Now turning to brand smart.
As Douglas mentioned brand Smart once again performed at a high level with overall product sales and e-commerce results exceeding our internal expectations.
We believe that our strength as a value oriented retailer will continue to attract a full spectrum of customers in this challenging economic environment.
In the third quarter.
<unk> product sales decreased by only a half of 1% from the third quarter of 2021.
Solid performance was primarily driven by strong execution of our promotional events are higher average transaction value.
Sustained revenue growth in appliances, and strong e-commerce sales.
In a short time, we have made meaningful improvements to the brand Smart E Commerce shopping experience and introduce new digital marketing strategies that are leading to significant revenue growth in this important acquisition channel.
For the third quarter E Commerce product sales were up 18% as compared to the prior year and in the quarter represented over 9% of total sales.
Our brand Smart team continues to perform at a high level as we introduced new strategies and tactics to drive this important new business segment.
Additionally, we are pleased with our progress in executing our integration and synergy initiatives related to the brand Smart acquisition and we are increasingly optimistic about the opportunities for future store and e-commerce growth.
Look forward to opening our first new brand smart store in 2023.
Now I will turn the call over to Kelly to provide further details on our financial results.
Thanks, Steve.
Holidayed revenues were $593 $4 million in the third quarter of 2022, compared with $452 2 million in the prior year quarter, an increase of 31, 2%.
This year over year increase was primarily due to the brand smart acquisition, which was offset by lower revenues at the Aaron's business.
Consolidated operating expenses for the quarter were higher than in the third quarter of 2021.
Primarily due to the impact of the brand smart acquisition on personnel expenses and other operating expenses and an increase the provision for lease merchandise write offs.
The increase the personnel expenses were partially offset by lower performance based personnel expenses at the Aaron's stores and our corporate functions.
Other operating expenses increased $17 $6 million in the quarter as compared to the prior year period.
Consistent with the second quarter of this year. This year over year increase is primarily the result of the acquisition of brand smart and higher occupancy shipping and handling and other miscellaneous expenses at the Aaron's business.
Which was partially offset by lower advertising cost at the Aaron's business and a gain related to the sale leaseback transactions initiated during the quarter.
Consolidated operating expenses were also higher year over year due to increased restructuring expenses and a goodwill impairment charge of $12 $9 million recorded in the quarter.
The need for an interim goodwill impairment test for the company was triggered by the decline in the company's stock price and market capitalization during the period we.
We engaged the assistance of a third party valuation firm to perform the interim goodwill impairment test.
This included an assessment of the Aaron's business and brand smart reporting unit's fair values relative to their carrying values.
The fair values were derived using a combination of income and market approaches and the company determined that the Aaron's business goodwill was fully impaired.
There was no goodwill impairment charge related to the brand smart reporting unit.
During the third quarter of 2022 restructuring expenses increased primarily related to operating lease right of use asset and fixed asset impairments and severance costs related to our real estate repositioning and optimization and restructuring program.
And our new operational efficiency and optimization program at the company initiated in the recent quarter.
This new program is intended to strengthen operational efficiencies and optimize the company's overall cost.
We believe that both of these restructuring programs will continue to support our long term strategic goals, while reducing our overall expenses.
Consolidated adjusted EBITDA was $35 $2 million in the third quarter of 2022.
Compared with $53 6 million for the same period last year.
The decline in adjusted EBITDA was primarily due to a decline in adjusted EBITDA at the Aaron's business offset by the contribution of brands Mark.
As a percentage of total revenues adjusted EBITDA was five 9% compared to 11, 9% in the prior year quarter.
On a non-GAAP basis diluted earnings were <unk> 31 per share compared with non-GAAP diluted earnings per share of 83 in the same quarter in 2021.
Adjusted free cash flow was $50 $1 million in the third quarter of 2022.
An increase of $46 million when compared to the same period in the prior year.
This increase was primarily due to higher cash provided by operations, which was largely due to lower inventory purchases that align with current demand trends.
And incremental proceeds related to the sale leaseback transactions initiated during the quarter.
Partially offset by higher capital expenditures in the current quarter.
At the end of the third quarter. The company had a cash balance of $37 8 million and total debt of $274 million.
This represents a $45 $9 million reduction to our net debt balance from the end of the second quarter.
Total liquidity, including availability under our revolving credit facility was $310 6 million on September 30th.
During the quarter, we paid a quarterly cash dividend of 11, two five per share returning $3 $5 million to shareholders. We.
We did not repurchase any shares in the quarter.
Turning to the business segments.
As a reminder, the Aaron's business segment includes the company operated Aaron's stores, the Aaron's Dotcom ecommerce platform Aaron's franchise operations brand smart leasing and Woodhaven, our furniture manufacturing operations.
The brands are March segment includes our 10 brands Smart USA retail stores and the brand smart USA Dot com platform.
The two business segments are not burdened by unallocated corporate expenses, which include but are not limited to equity based compensation restructuring and separation and acquisition related costs interest expense goodwill impairment charges and certain other corporate functions.
At the Aaron's business total revenues decreased eight 7% in the quarter to $412 $9 million, primarily due to the lower lease revenues, which were attributed to a lower lease portfolio size during the quarter and a corresponding decline in customer payment activity that Steve discussed.
Earlier.
Same store revenues were consistent with our expectations declining seven 7% compared to an increase of four 6% for the prior year's quarter.
Gross profit was $257 million, a decline of nine 7% as compared to the prior year quarter.
The decline in gross profit was primarily driven by lower lease renewal rates and lower new lease originations as well as higher inventory purchase cost as compared to the prior year quarter.
Operating expenses at the Aaron's business decreased $1 million in the quarter as compared to the prior year period due to lower performance based compensation and other operating expenses, partially offset by a higher provision for lease merchandise write offs.
The provision for lease merchandise write offs as a percentage of lease revenues and fees for the third quarter was seven 5% compared to four 9% in the prior year period.
This increase in the provision expense is in line with our expectations for the quarter was primarily due to a higher frequency of charged off lease agreements and an increase in the average net book value of the lease merchandise that was charged off.
Additionally, the increase in write off percentage was impacted by the lower lease revenues in the quarter.
Similar to the second quarter of this year, we believe that charge offs were impacted by the quarter's high inflationary environment and we expect this trend to continue into the fourth quarter.
Adjusted EBITDA for the Aaron's business was $42 $5 million in the quarter.
Compared with $66 8 million for the same period in 2021.
Due primarily to a decrease in gross profit and a higher provision for lease merchandise write offs, partially offset by lower personnel costs.
As a percentage of total revenues adjusted EBITDA was 10, 3% compared to 14, 8% last year.
At brand Smart retail sales in the third quarter of 2022 or $183 $3 million, which is approximately one 1% lower than the same quarter of the prior year.
Profit was $41 million or 22, 4% of retail sales and adjusted EBITDA for <unk> was $6 $6 million for the quarter adjusted EBITDA margin was three 6%.
Okay.
Finally, please note that we have revised the full year 2022 outlook that was provided in our second quarter earnings release.
We have raised the midpoint of our outlook for consolidated revenues earnings and adjusted free cash flow.
Our revised outlook continues to reflect our expectation that the current high inflationary environment, we will continue to adversely impact customer demand, including average ticket size in both businesses lease portfolio size lease renewal rates the provision for lease merchandise write offs and other segment level on corporate expenses.
Yeah.
With that I'll now turn the call over to the operator, who will assist with your questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad, if you'd like to Julie a question. Please press star followed by two when preparing to ask you. A question. Please ensure you're on mute locally.
Our first question comes from Anthony <unk> of loop capital markets. Anthony Your line is open. Please proceed.
Good morning, Thanks for taking my question I guess my first question.
Is on the rollout of.
<unk>.
Lease solution to bring smart stores, if you could just give us update on how that's going.
Yes, Anthony it's Douglas I mean, as we mentioned on the last call.
We get that up and running in May of this year and so it's in all stores.
According to plans, we're really happy with that we've been able to.
The increase in portfolio size is we are as we're gaining penetration in those stores I would say the uptake.
In terms of customers to that product is where we thought it would be and we're continuing to optimize it and build all the infrastructure around it I think when we communicated.
At the time of our acquisition deal, it's going to be about a three year process to begin building that portfolio and it still won't be at full run rate by year three in those 10 stores and so we're happy with the progress we're making we're continuing to optimize it.
Got it that's helpful. And then you mentioned in the Aaron's business that merchandize deliver steadily improving customer demand was stronger than you expected I guess my question are you seeing any sort.
Credit trade down in other words are you seeing any indications that subprime credit is tightening at all and maybe you are getting the benefit from that like you've seen in prior.
Economic downturns.
So far we have not seen any any sign of a trade down it's tough to gauge we do believe that default rates increase.
And the credit stack above us and credit gets restricted it'll benefit the lease to own market, but where.
Not seeing anything in particular right now we do monitor external.
Sources on that to look for tightening and we're also looking at our internal data to identify if we're experiencing any higher credit scores entering our space or if we're seeing credit scores in the mid range or lower range of our space increasing proportionately.
And that would tell us if there's a trade down happening, but we've got you know.
All eyes on it but to date, we have not seen it but when we do it'll it'll appear in the form of new customers disproportionately growing in our space.
Got it.
Thanks, and good luck with the holiday selling season.
Yeah.
Thank you.
Thank you. Our next question comes from Kyle Joseph of Jefferies <unk> Co. Your line is open. Please proceed.
Hey, good morning, Thanks for taking my questions and I appreciate the new format on the press release.
Great, let's say at that we see in the lease renewal rate and what that's done year over year can you give us can you remind us where the lease renewal rate is versus kind of the long term historical average.
That's the first question and then second question you guys talked a lot about our centralized underwriting but talk about any sort of any.
Yeah.
So as you.
Probably call it just like in our numbers pre pandemic, our renewal rates for between call. It 80, 789%.
During the stimulus aided period, those rose to about 88% to 91%.
We really saw that begin to happen in the latter part of.
We had anticipated that in the back half of the year, our lease renewal rates would be between 100 150 basis points lower than the prevent spend any level. So what we were expecting in Q3 played out exactly in line with what we were forecasting and then the updated some of our revised outlook.
Got it really helpful.
The last comment I would make on lease decisioning as we expect to have the least decisioning tightened for the near term and that's reflected in both our demand assumptions for our outlook and our renewal rate assumptions.
50 to 100 basis points right as we're seeing some tightening of average ticket size.
At least in the near term.
Great. Thanks, very much for answering my questions.
Thank you. Our next question comes from Scot Ciccarelli of choice Securities. Your line is open. Please go ahead.
Thank you and good morning, everyone.
I guess I had a follow up question on the comment that you werent seeing any trade down activity Douglas.
Models, but.
We're constantly looking for different profiles of customers coming in and we're also looking at external data, we do have brand smart as a retailer. That's another data point that allows us to see what's happening in the cash register and whether there is changes in the credit stack above us there.
And we monitor that as well so there's really two sets of internal data that we're looking at and.
Well I would sort of characterize the market right now is volatile.
We still see peaks and valleys in terms of customers coming in and out of our space, but nothing sustained at this moment.
Got it okay, and what do you think changes that like what what would cause us to kind of revisit the type of experience you had back in kind of like Oh, eight or nine where you actually had people kind of coming into the top of the funnel if you will.
We didn't see it happen over a quarter right.
It happened over a series of quarters, when we started to benefit from it.
Some of the external data that we're looking at our average outstanding balances on credit cards average savings rate in households, kind of stratified based on credit hyper score and so as we look at that what we're seeing is that certainly availability of credit to the consumer is tightening right defaults are starting to tick up in the consumer space.
Right above us, which is a trend similar to what we saw.
In the prior period, but again that that played out over a series of months and really kind of two or three quarters before it led to.
If it to the business. So that's what we're watching it's to be seen.
Plays out exact.
I recall the last recession was a liquidity driven recession. This one.
A different dynamic, but we're starting to see it play out in kind of a similar macro trends and results in terms of impact on the consumer.
Tightening liquidity and then we're believing we'll play out ultimately into.
If you'll need for payment options.
Got it that's very helpful and exactly right yes.
Go ahead Scott.
No I was going to say that that's very helpful and I either sidebar I didn't want to cut you off sorry Douglas.
Yeah, I was just going to say 089 was a bank led recession with significant tightening very quickly things have changed.
Since that time, and I think the tightening will happen.
If it does more gradually this time there was also the dynamics are different here or there was a significant pull forward in demand through the pandemic.
Not deny precede the financial crisis at that time, so there's two things going on on the demand side and on the sort of what's going on with the consumer side I would also note unemployment.
Was a lot higher than and.
Inflation's, a lot hotter now and while it's abated slightly it hasn't abated that much. So we continue to monitor all of those things, there's a lot of macroeconomic variables going on right now.
Yep very helpful and then the last one.
You guys have that obviously had a pretty big increase sequentially in terms of yet you write off provision do you think provisions have peaked or are we looking at kind of like them moving to even higher levels, just kind of given the macro environment.
Yeah, Hey, Scott, it's Kelly so.
Our view on write offs for this year are unchanged from the last update that we had at that time, we were anticipating that we'd end the year somewhere between.
6% to 7% of lease revenues are write offs would and that continues.
Continues to be what we're seeing right now I think what I'd point out is.
One write offs for the third quarter were right in line with what we were expecting so.
With the team to deliver on that right in what's been a very very challenging payment environment right.
But the second thing I want to point out is that in a typical year.
Third quarter is our highest.
Quarter for write offs.
And then you tend to see about a 25 to 50 basis point improvement as you go from Q3 into Q4, that's looking at kind of pre pandemic averages.
Listen I, we're not anticipating things will get materially worse, we were actually expecting that we'd see performance in Q4 relative to Q3 in line with kind of this pre pandemic trends.
But obviously, we're paying close attention to that as you know.
Inflation data continues to come out and we're watching the performance of the customer going into the holiday season. So hopefully that gives you a little bit more color kind of building upon what we shared last quarter.
Really helpful. Thanks, guys.
Well thank you.
Thank you. Our next question comes from Bobby Griffin of Raymond James will be your line is open. Please go ahead.
Good morning, Bonnie Thanks for taking my questions.
Kelly I guess, Bobby this is kind of a two part question here, but.
Can you maybe expand a little bit on the.
Our restructuring program is that kind of a multiyear program and.
Some of those savings flowing to the bottom line or is that just really to help offset kind of other inflationary pressures, we see basically across retail today, and then kind of the second part of this question is with the portfolio being smaller what levers do you have in the business to kind of pull on the cost side as we enter 2023, because I know a smaller portfolio can drive.
De leverage in other parts of the business when we think about tuning up our models for 2023.
Yeah. Thanks for the question so in regard to our new program.
We're at the early innings of kind of focused on that so I do expect it's going to.
Kind of last over a few quarters here.
And into next year, but we're.
Currently kind of sizing the duration of it.
I would point out is the areas that we're going to be focused on us.
Underperforming stores right that arent part of our broader Jim next strategy that we may be consolidating to drive some efficiencies.
Focusing on our operational model some central tweaks, we can make there to pull costs out of the stores.
Continued focus on central centralizing much of the activity that takes place in the stores into our corporate functions as well as just kind of overall cost across the organization. So it's multifaceted right.
We're we've got teams internally and we're partnering with folks externally to assist us with it and would expect to.
As we head into the next quarter to be in a position Bob to provide.
More specific guidance around kind of size and duration at that point in time, but to answer your specific question. It is not a one quarter exercise, it's something that we anticipate is going to kind of go forward over the next few quarters.
Bobby I'll take the second part of your question I mean in terms of cost efficiencies obviously.
Our margin flow through in the portfolio size of renewal rate is what it is but we believe as the portfolio size.
Shrinks and even stabilizes, there's there's opportunity to take cost out of the business, we've been doing that through store consolidation.
And through modernization of our platforms.
<unk> is a significant differentiator for us our E comm business grew in sales, 24%, we got higher conversion there.
We believe a better customer experience that creates efficiency and it takes labor out of our stores. We're also investing as you know continually and decisioning.
In servicing technology, 80% of our customers are paying us outside of the stores now and that allows for more efficient store opportunity. They can be more productive and it takes labor out of the stores and.
And we continue to find ways to be more efficient there through centralization of a lot of activities, including delivery and the whole service process. So we continue to work on that we have multiple things in test and we're optimistic.
Oh about continuing to optimize the cost structure. The last thing I'd say is on the.
Supply chain.
We continue to look at our supply chain. So as our store base shrinks you know we look at our fulfillment centers. If you look at our.
Trucks on the road et cetera, and we're continuing to find more ways to take them.
Cost out there and the last thing our biggest expenses pay pay in our stores and our variable pay structure does flex up and down during these times and so we've got a.
Great pay structure for all of our team members in our stores, but it does move up and down with the state of the business.
Okay. That's very helpful. I appreciate that and maybe just a follow up and follow up on Scott's question before me.
When you look at the different tranches that you've been writing like you guys have tightened a few times here. This year. When you look at some of the newer tranches of leases that have reflected the updated credit conditions. In your updated Decisioning are you starting to see signs that lease merchandise or renewal rates is stabling and I guess, maybe first payment rates.
First Ms payment rates coming down or just anything inside kind of a newer leases that would give hope that maybe were at a peak year of the impact on the consumer or is it still probably too early to call that corner.
Yeah, Yeah, I think it's too early to call that corner Bobby.
We continued to see softening into the third quarter, but it was as expected our outlook that we gave on July 25th.
Had weakening in both renewal rates and write offs higher write offs through the course of the year and those are coming in right in line with our expectation.
And our fourth quarter.
Our guide for the rest of the year.
<unk> about the same level as we're seeing now so we're not making a forecast for 2023 will update you on future calls on that.
Okay I appreciate all the details best of luck here.
Yeah.
Thank you.
Okay.
Thank you. Our next question comes from Jason Haas of Bank of America. Jason. Your line is open. Please proceed.
Hey, good morning, and thanks for taking my questions.
I'm curious to hear more about what drove the improvement in brand Smart I think on the last call you had said that.
I believe it was July was running in line with the down 7% that you did in <unk>. So I'm curious what drove that improvement in August and September and what are you seeing now as we go into October here.
Hey, Jason This is Steve Thanks for the question.
So as as July proceeded we absolutely started to see some improved results.
August went positive.
As a result of.
Some great work around our promotional events leading up.
To do the holiday in.
<unk> as well as strong performance in appliances and E Commerce those trends continued into September .
And then saw a little softening in the back half of September maybe somewhere around the hurricane.
And then as we look into October some of the trends. We're seeing we have definitely seen a little softening in average transaction values a lot of that coming through in consumer electronics, you average selling prices dipping in Tvs and computers and things like that so we're excited about our holiday season.
Excited about the marketing plans, we have in place excited about the strong performance of our ecommerce business down at brand Smart and.
Well, we'll see how the customer reacts, but what we think our plans are right and.
The team is ready for for the customer to shop during the holiday.
I think you signed that average transaction value was down at brands for.
That's another indicator of everything the consumer has not yet turned yet so we continue to see that consumer looking for value both at Aaron's and at brand smart and they're seeking it out and there are price shopping across competitors.
And we believe our promotional strategy our value prop is well aligned with that particularly on the retail side is the near Prime and Prime consumer who we don't see at Aaron's is looking or seeking out value and other places.
Brand Smart is a destination big box high volume destination for value type appliances electronics and other home goods and we're super excited about that value prop given this economic environment.
Great. Thank you and then as a follow up question maybe for Kelly on the interest expense for <unk> I'm getting it seems to imply based on the press release, I think maybe like six or $7 million of interest expense is that right for <unk> and then is that the right. If I did the math right. There is that the right.
Like quarterly run rate to use history, as we think into future quarters next year.
Yeah, I'd say that that looks a bit a bit high to me, Jason as I think about the fourth quarter.
Right.
Just want to make sure that you're using the right rates right.
For our debt in Q3, the average rate on our credit facility.
<unk>.
Just over 4%, it's a variable rate facility, you know sofa plus a spread.
So I think we'll get there.
And the average between call it five in the quarter and 6% quarter on an annual basis as we end the year here. So if you use those numbers that should help you kind of tighten up that that estimate that youre getting on the interest expense.
Okay got it I think.
Maybe my numbers are a little off if I could squeeze one last thing.
I was just curious about the spread between.
Sales and comps for Aaron it looks like for <unk> the sales growth.
Wasn't it wasn't down as much as comps.
But then it looks like what's implied for <unk>, which we'll see sales growth.
Lower than what's implied for comp. So I'm just curious if you could talk about the dynamic there I know it can swing around.
Based on when you close stores and transfer over those leases so.
Any color around how to think about that would be helpful. Thanks.
Yes, Jason.
I, maybe misinterpreting, what you're saying, but are you are you asking about sales relative to same store revenues that concept.
Yeah, Okay, yeah, so our sales at Aaron's, while they were down but improving sequentially. During the quarter are only one contributor to our lease portfolio size. So we sell into our lease portfolio and we have leases churn out of our lease portfolio. We ended the portfolio down.
Four 8%.
At the end of the quarter and so that's going to that's our starting point for revenue and then we further have to collect on the portfolio and we were down roughly 350 basis points on collections.
Four down would you have to have really average for the quarter down in portfolio size.
Then the degradation and renewal.
Our renewal rate is really what's driving the minus seven 7%.
And same.
Same store revenues that is a different concept and when we talk about sales in the Aaron's business, which is how much do we put it into the portfolio in the quarter so that.
That will continue to be a differentiator as we talked about are in the same store revenue, which has achieved revenue on the portfolio year over year versus the brand smart comps year over year in terms of product sales, which is really a retail sale.
Yeah, two other things I would add there Jason one when youre looking at the segment level of lease revenue and fees for the Aaron's business that does include <unk> leasing, whereas our same store sales comp number does not so I believe that sales lease revenues and fees were down seven 3% in the quarter versus a day.
175% comp right. So the addition of the brand smart leasing revenues, while small help there. The other thing is our same store sales.
Comp set does not include all of our stores and.
Some of those forces tours that are excluded would include Gen next stores, which are performing materially better than our legacy stores. So that's another thing that is contributing to the.
The difference in the numbers here.
Got it that's helpful. Thank you.
Welcome.
Thank you as a reminder, if you wish to submit a question. Please press star followed by one on your telephone keypad.
We have a follow up from Anthony <unk> of loop capital market. Anthony Your line is open. Please proceed.
Thanks for allowing me to double dip here.
Just wanted an update in terms of how you're thinking about capital allocation. Obviously you took on some debt.
To do the brand smart deal, but youre going to generate.
Solid free cash flow and obviously your valuations just super depressed So just love an update on that thanks.
Yeah. Thanks for the question so within our our capital allocation priorities are unchanged right as we move through the year here you may recall that on our last call in discussions for the quarter right.
What's changed is that we do have.
Debt on the balance sheet. So as we think about our capital allocation priorities first and foremost we're going to continue to invest in the business to support our strategic initiatives and drive earnings growth.
We're focused on reducing our debt balances right and staying in line with our target debt levels there.
Third opportunistic M&A as things come up which is less of a focus right now, but it's part of our part of our strategy and then fourth returning capital to shareholders. So obviously, having returned $3 $5 million to shareholders through dividends and the prior quarter.
So thats something Thats continues to be important to us I would remind you I think you know.
That's right, we do have $136 million remaining on the share repurchase authorization that our board granted to us.
That's something that we're looking at each quarter as well as I want to highlight that in the third quarter. We did reduce net debt $46 million, which is in line with that second point in our capital allocation priorities.
That's helpful. Thank you.
Youre welcome. Thank you.
In <unk>. We currently have no further questions. So I'll hand back over to Douglas Lindsay for any closing remarks.
Thank you operator, we appreciate everyone who's joined US today, although we continue navigating a challenging economic environment. Our team members remain focused on delivering exceptional value and service to our customers and innovating our business every day.
We're continuing to benefit from investments, we've made in lease decisioning and digital payment and servicing platforms.
And we continue to invest in growth both at both Aaron's and brand smart through our E Commerce and new store programs and we're very excited about that thank you again for being with US today and we'll talk to you soon.
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Ladies and gentlemen. This concludes today's call you may now disconnect your lines.
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