The Aaron's Company Inc. Q1 2023 Earnings Call
Speaker 1: That can be found at the end of the earnings release.
Speaker 1: The Safe Harbor provision identifies risks that may cause actual results to differ materially from the content of our forward-looking statements.
Speaker 1: Also, please see our Form 10K for the year-end December 31, 2022 and other filings with the SEC for a description of the risk related to our business that may cause actual results to differ materially from our forward-looking statements.
Speaker 1: On today's call and in the release, we refer to certain non-GAAP financial measures, including EBITDA, and adjusted EBITDA, non-GAAP net earnings, non-GAAP EPS, and adjusted free cash flow, which have been adjusted for certain items, which may affect the comparability of our performance with other companies.
Speaker 1: These non- GAAP measures are detailed in the reconciliation tables included in our earnings release, and the supplemental investor presentation posted on our website.
Speaker 1: With that, I will now turn the call over to our CEO , Douglas Lindsay.
Speaker 1: Thanks Keith, good morning everyone. Thank you for joining us today and for your interest in the Aaron's company.
Speaker 1: A police report that we delivered consolidated company earnings for the first quarter that were ahead of internal expectations.
Speaker 2: Despite lower revenues in both business segments.
Speaker 2: In the errands business, a police report that we ended the quarter with a higher lease portfolio size than expected.
Speaker 2: As we've noted before, our least portfolio size is a leading indicator for future revenues.
Speaker 2: And our strong performance in the quarter was a result of fewer customers exercising early purchase options.
Speaker 2: and low write-offs.
Speaker 2: The portfolio benefited from enhancements to our least-deficiting model.
Speaker 2: And we expect these benefits to carry forward in the year, as leases initiated under our Titan model reflect a greater percentage of the total portfolio.
Speaker 2: I'm also very pleased with the progress we've made in our market optimization and cost reduction initiative.
Speaker 2: which contributed meaningfully to our bottom line in the first quarter.
Speaker 2: In addition, our e-commerce business continues to grow, and we continue to open more more Jim explanations. ??? prends?
Speaker 2: Our gymnac stores now make up more than a quarter of Aaron's lease and retail revenues.
Speaker 2: In the Brand Smart business, demand continues to be challenging.
Speaker 2: Macroeconomic factors continue to weigh in our customer, who remains cautious in their purchasing decisions.
Speaker 2: especially for big ticket and discretionary product categories that we carry.
Speaker 2: We remain focused on enhancing profitability in this segment.
Speaker 2: through direct procurement savings, strategic pricing actions, and cost controls.
Speaker 2: while also continuing to invest in enhancing and growing the business.
Speaker 2: We remain confident in BrandSmart's compelling value proposition.
Speaker 2: and its long-term growth opportunities.
Speaker 2: In particular, I am excited to announce that we plan to open our first new BrandsMart store in Augusta, Georgia in the fourth quarter of this year.
Speaker 2: Now turning to the consolidated company results.
Speaker 2: A plan to report that we reduced net debt by nearly $37 million in the quarter, and ended the quarter with $352 million of available liquidity.
Speaker 2: This was primarily a result of strong cash flow from operations, demonstrating the advantage of our recurring revenue model in the errands business.
Speaker 2: Given our performance in Q1.
Speaker 2: And the larger and healthier leaf portfolio than expected in the quarter, we have updated our outlet for the year, which reflects higher expected earnings for the year in business.
Speaker 2: and lower expected earnings at France Park.
Speaker 2: In addition, our updated outlook includes both higher earnings per share and higher free cash flow for the year.
Speaker 2: I do want to note that our outlook does not assume any further credit tightening above us.
Speaker 2: However, if that were to occur, we believe that the errands business would benefit over time from increased customer demand.
Speaker 2: As we look ahead, we remain focused on optimizing profitability in both businesses.
Speaker 2: We continue to make progress on the execution of our multi-year strategic plan. This includes our growth initiatives for both errands and brand smart.
Speaker 2: as well as our cost reduction initiatives that we announced last quarter.
Speaker 2: I want to thank our teams at Aaron's, Grant Smart, and Woodhaven for their hard work this quarter.
Speaker 2: And for their continued focus on providing exceptional value and service to our customers.
Speaker 2: Then you can focus on providing exceptional value and service to our customers. I will now turn the call over to Steve.
Speaker 3: Thanks Douglas and good morning everyone.
Speaker 3: As Douglas just mentioned, the errands business delivered first quarter results ahead of our internal expectation.
Speaker 3: In the errand business, merchandise deliveries across all origination channels.
Speaker 3: We're down mid-single digits year over year.
Speaker 3: Deliveries were impacted by lower customer traffic and strategic actions we made to tighten lease decisioning.
Speaker 3: Our lease renewal rate for the quarter was 88.5% for all company-operated air-instores.
Speaker 3: This was down 90 basis points year over year.
Speaker 3: However, we are pleased that the Leesion and Willer-Rate and Q1 was 270 basis points higher than the prior quarter.
Speaker 3: As typical and chew one of each year.
Speaker 3: We experienced lease renewal rate improvement related to the tax refund season. In addition, this year we experienced further benefits from ongoing optimization of lease decision.
Speaker 3: Also, I want to bring your attention to a new metric related to least renewal activity that we are sharing for the first time in our investor presentation.
Speaker 3: Our 32-plus day non-renulary measures the number of least-owned customers who are one month or more non-renewed.
Speaker 3: At the end of the first quarter, this rate was 1.6%.
Speaker 3: This was an improvement of 110 basis points from the prior quarter, and more importantly, flat to the prior year period.
Speaker 3: As we look at the overall health of the portfolio, we see the 32-plus day non-renewal rate as an important leading indicator for future write-offs.
Speaker 3: Moving to our least portfolio side.
Speaker 3: We exceeded our internal expectations by ending the quarter with a least portfolio size of $121.9 million.
Speaker 3: This was a decrease of 7.5% compared to the prior year quarter. However, we are pleased with this larger than expected least portfolio at the tax refund season comes to an end.
Speaker 3: Now let's talk about our important growth initiatives for the errands business.
Speaker 3: As of the end of the quarter, Gen X stores now account for approximately 27% of our lease revenues retail sales.
Speaker 3: That compares to approximately 15% in the prior year quarter.
Speaker 3: Least the ridge and the gen next stores open less than one year. Continue to grow to rape of more than 20 percentage points higher than our legacy store average.
Speaker 3: In addition to opening Gen X sores, we also continue to execute our new hub and show them programs. Welcome to the chart.
Speaker 3: So far this year, we have converted 34 additional showrooms.
Speaker 3: bringing the total number of converted locations to 63 since she launched the program.
Speaker 3: Now turning our attention to e-commerce.
Speaker 3: A Recomers platform is a key vehicle for new customer acquisition and a revenue driver for the Air and Business.
Speaker 3: In the quarter, revenues generated from leases initiated on the Airens.com platform increased 12.3% year-over-year. E-commerce now represents 17.9% of total lease revenues.
Speaker 3: This compares to 15.2% in the prior year quarter. In addition, our digital marketing strategies and tactics are gaining momentum.
Speaker 3: I am pleased report that the volume of least applications completed on errands.com increased your year over year.
Speaker 3: Despite the higher volume of lease application.
Speaker 3: recurring revenue written into the portfolio from ecommerce decreased 5.5% compared to the prior year quarter.
Speaker 3: This decrease was a result of piterly decisioning lower conversion and lower average ticket.
Speaker 3: As we continue to innovate the parents business.
Speaker 3: we are focused on enabling our customers to move seamlessly among our in-store and online platforms.
Speaker 3: to move seamlessly among our in-store and online platforms. Now turning to Brandt Smart.
Speaker 3: We continue to operate in a challenging macroeconomic environment as customers remain cautious with their discretionary purchases.
Speaker 3: As a result, we are experiencing weaker customer traffic in a lower average friend's active value.
Speaker 3: Product sales were down in both our in-store and e-commerce channels by approximately 18% as compared to the prior year quarter.
Speaker 3: In the face of this challenging demand environment, we continue to focus on optimizing our profitability.
Speaker 3: Direct procurement savings and strategic pricing actions help improve our product growth margin.
Speaker 3: by approximately 60 basis points as compared to the prior year quarter. In addition, we continue to focus on expense reductions in optimizing our labor model.
Speaker 3: As we look to the future, we remain focused on achieving transactions energies, enhancing our ecommerce platform, and opening our first new BrandSmart store.
Speaker 3: Similar to the errand business, e-commerce remains an important channel to acquire new brands as most customer.
Speaker 3: We continue to invest in digital marketing and we are improving your online shopping experience.
Speaker 3: Also, as Doug's attention, we plan to open our first new brand's March to Hornig up to Georgia in Q4.
Speaker 3: I'm excited about this opportunity to bring our competitive prices, broad product selection, and exceptional customer service to Augusta.
Speaker 3: We are confident that our brand and our customer value proposition.
Speaker 3: confident that our brand and our customer value proposition will resonate in this new market.
Speaker 3: Now, I'll turn the call over to Kelly to provide further details on our financial performance.
Speaker 3: Now I'll turn the call over to Kelly to provide further details on our financial performance. Thanks Steve.
Speaker 3: And less stated otherwise, my comparisons to prior periods will be on a year-over-year basis. Consolidated revenues for the first quarter of 2023 were $554.4 million, compared with $456.1 million. This is up primarily due to the acquisition of grants mark.
Speaker 3: and offset by lower revenues of the errands business. Consolidated Adjusted EBITDA was $45.9 million, compared with $57.9 million.
Speaker 3: This is mostly down due to a decline in adjusted EBIDA at the air's business.
Speaker 3: offset by the contribution of Brandsmark.
Speaker 3: As a percentage of total revenues, adjust the diva dot with 8.3% compared to 12.7%.
Speaker 3: On a non-gap basis, diluted earnings per share were 66 cents compared to 87 cents.
Speaker 3: Net earnings in the quarter included a net income tax benefit of $6.6 million or 21 cents per share.
Speaker 3: Effective as of the start of this fiscal year, we have elected the Treat Aaron's LLC, a subsidiary of the company, as a corporation for income tax purposes. This election is expected to change our state apportionment percentages, resulting in a favorable remasurment of certain state deferred tax assets.
Speaker 3: Despite the lower earnings in the quarter,
Speaker 3: Ajusted free cash flow was $42.5 million, an increase of $29.9 million, or over 200 percent.
Speaker 3: This increase was driven by higher cash provided by operations as we lowered our inventory purchases at the Aarons Business and BrandsMart to align with current customer demand trends. During the quarter, we continued to return capital to shareholders.
Speaker 3: declaring $3.9 million dollars in dividends. We did not repurchase any shares during the quarter.
Speaker 3: In addition, we ended the first quarter with $44.3 million of cash and $222.1 million of debt. This is a $36.9 million reduction in our net debt balance from the end of Q4 2022 and improves our net debt to adjusted EBITDA leverage ratio.
Speaker 3: to 1.1 times. Now, I'll dive into the financial details for Q1 at the business segments.
Speaker 3: A total revenues decreased 9.6% from the prior year to $412.1 million. Primarily from lower lease revenues in the segment.
Speaker 3: These revenues were lower due to a smaller lease portfolio size, lower lease renewal rate, and fewer exercises of early purchase options by our LTO customers in the quarter.
Speaker 3: In addition, retail sales, non-retell sales, and franchise are all denen and things that are lower here over years faster, even higher than the
Speaker 3: Gross profit in the quarter was $260.7 million, down 8.5%.
Speaker 3: This is attributed to a smaller lease portfolio size, lower lease renewal rates, and lower new lease originations.
Speaker 3: However, since fewer customers exercised their early purchase options this Q1, gross profit margin increased 80 basis points to 63.3%. Building expenses decreased $7.9 million.
Speaker 3: This was due mostly to lower personnel costs and a lower provision for lease merchandise write-offs.
Speaker 3: and were partially offset by higher other operating expenses. We continue to be pleased with the improvement in our write-offs.
Speaker 3: The provision for lease merchandise write-offs as a percentage of lease revenues and fees was 5.4% compared to the same 5.4% in the prior year period. Although flat year over year.
Speaker 3: This was a 170 basis point improvement from the fourth quarter of last year.
Speaker 3: We believe this improvement is the result of three things. First, seasonally stronger customer payment activity. Second, enhancements we've made to fraud controls and our least decisioning algorithms.
Speaker 3: And third, strong execution by our store operations and store support center teams. Adjusted EBITDA at the Ares business was $54.6 million, compared with $69.9 million.
Speaker 3: This decline was primarily due to a smaller lease portfolio size and a decline in our lease renewal rates.
Speaker 3: These were partially offset by lower personnel expenses and the lower provision for ride-offs I just reviewed.
Speaker 3: As a percentage of revenue adjusted to EBITDAQ was 13.2% compared to 15.3%.
Speaker 3: Now turning to BrandsMart's financial results in the quarter. Sales sales were 144.2 million dollars.
Speaker 3: Gross profit was $35.1 million or 24.4% of retail sales. And adjusted even though was $2.8 million. Adjusted even though margin was 1.9%.
Speaker 3: Yesterday, we issued our first quarter orange release.
Speaker 3: which includes the complete detail of our updated four-year 2023 outlook.
Speaker 3: This revised outlook assumes no significant deterioration in the current retail environment.
Speaker 3: state of the U.S. economy or global supply chain as compared to their current condition.
Speaker 3: It also does not reflect any meaningful impact of credit tightening for the prime and the prime credit consumer.
Speaker 3: This revised outlook reflects our expectation that total revenues for the consolidated company.
Speaker 3: will be between $2.15 billion and $2.25 billion.
Speaker 3: We have lowered revenues to reflect lower early purchase options and lower retail sales at the Aaron's Business in Q1 and the remainder of the year.
Speaker 3: This update to consolidated revenues also includes expected lower product sales at Brandsmark. We have increased our earnings outlook for the Aaron's business and lowered our earnings outlook for Brandsmark. Brandsmark.
Speaker 3: With these two changes, our outlook for consolidated adjusted even is unchanged.
Speaker 3: remaining at a range of $140 to $160 million for the year.
Speaker 3: We have raised our outlook for non-GAP EPS and adjusted free cash flow.
Speaker 3: This increase to EPS to between $1 and $1.40 includes the benefit of the deferred tax revaluation I described earlier and lower expected depreciation and interest expense for the remainder of 2023.
Speaker 3: We are now expecting to lower your in-depth balance.
Speaker 3: In addition, we entered into an interest rate swap last month. This swap reduces our interest expense rate on a portion of our outstanding debt as compared to our previous outlook. And to wrap it up, I want to highlight the increase to our adjusted free cash flow outlook.
Speaker 3: This increase to a range of $75 to $85 million for the full year reflects our strong cash flow in Q1.
Speaker 3: Higher after-tax earnings. Continued inventory and working capital management.
Speaker 3: and lower CAPEX for the year. And with that, I'll now turn the call over to the operator for Q&A.
Speaker 4: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now.
Speaker 4: If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally.
Speaker 4: That's Star One for any questions now. And our first question today is from the line of Collegiate of Jeffries. Colleg please go ahead.
Speaker 5: lower tax refunds, so how are you thinking about underwriting from here? How is your consumer, are they kind of adjusting to inflation at this point? Just give me a sense for how you're thinking about that.
Speaker 2: I think it continues to be a wait and see. We're really encouraged. We give a new metric this quarter 32 plus date the link and sees.py.pypypy.pypypypy.pypypypypypypypypypypypypypypypypypypy. By
Speaker 2: And as you see, that's decreased from kind of the mid 2% range to 1.6% over the last 12 months, which is really encouraging. I think as we look at the consumer, we're still in the sort of a state of transition, I would say, the peers that the consumer's acclimating to the inflationary environment that we're in. I do believe that the decisioning changes that we've made in the last year and that have been really ongoing, it's been optimization of benefiting us. And we continue to make, I would say, remain cautious there.
Speaker 2: When in any environment like this where you see improved loss rates and improved the linguacies of write-offs, you tend to look at your decisions going forward and make that assessment as you go and we'll continue to do that. But I would say generally the state of the customer is continues to be under stress, demand continues to be pressure, but we're really happy with what we've done internally.
Speaker 5: You got it very helpful. And then, just got a few questions in terms of the changes to EPS versus EBITDA guidance. It's EPS going up, but that's just a function of delabbering and then the swap you mentioned that I should help control kind of interest expense versus initial expectations. And then, just a few questions in terms of the changes to EPS versus EBITDA guidance.
Speaker 5: And then on the balance sheet obviously you did a good job of delivering in the quarter, you know, how are you thinking about leverage at this point?
Speaker 3: Yeah, the college, it's Kelly, I think you're spot on there, right? We had the 21 cent tax related item that we called out in some detail. So obviously that's influencing the four year outlook as well as lower interest expense for the remainder of the year.
Speaker 3: We also have lower depreciation expense coming through the remainder of the year, having taken our CAPEX assumptions down as well. And then S, from a debt perspective, with the stronger free cash flow that we had in Q1, the continued expectation of strong free cash flow through a remainder of the year, our view is that absent some of the use of that cash, yes, our debt balances will continue to be lower, also contributing to that.
Speaker 3: year of between going to call it 10 and 11 percent. Got it. That's it for me. Thanks for answering my questions.
Speaker 5: to 11%. Got it. That's it for me. Thanks for answering my questions. You're welcome. Thank you.
Speaker 4: Our next question today is from the line of Anthony Chikumba of Loop Capital. Anthony please go ahead your line is open.
Speaker 6: Thanks for taking my questions. I guess my first question is just on how you're thinking about capital allocation, particularly given the fact that you beat your internal expectations of the first quarter and you raise your free cash flow guidance and obviously your stock is...
Speaker 6: depressed you know on a valuation basis. How do you think about that?
Speaker 3: Yeah, Anthony, so I'd say our capital allocation strategy really remains unchanged from what we've described, you know, last quarter. So just a quick reminder, right? First, we're focused on investing into the business where we're achieving the appropriate targeted returns. Right. Second, we're focused on maintaining a conservative leverage profile more specifically between.
Speaker 3: that in the past through a combination of dividends and share repurchases and while we didn't repurchase any shares in Q1 we do have $133.5 billion remaining under the share repurchase authorization that our board had approved the year before last.
Speaker 3: And then finally, we will selectively look at opportunity in M&A, to answer your question a bit more specifically, we don't give specific guidance on exactly how we're going to use the cache, but we use that framework to make decisions as we go corner to corner. So hopefully that's helpful.
Speaker 6: Aaron's least owned solution into Brandsmart stores. I know it's in the stores but my understanding is that you wanted to make some sort of refinements to it. So I was just wondering if we can get an update there. Sure, hi Anthony this is Steve. You know today we're pleased with the performance and we would say we're ahead of our internal expectations on the key LTO metrics.
Speaker 6: things like portfolio size, renewal rate, and just the overall demand coming into BrandSmart Leasing. Just to remind you, we rolled it out in May of last year, so we're just about a year into that rollout, and we're making continuous improvements both from a process standpoint and a systems, and we feel we're well positioned if and when the credit tightening above us occurs.
Speaker 2: Yeah, indeed. Just add that the team has done a fantastic job to launch that and we believe there's
Speaker 2: additional operational enhancements to gain more market share there and stream line the process. We're proud we're sort of early earnings on that, but we're optimistic about the future of that synergy. It's very helpful. Thank you. The next question today is from the line of Bobby.
Speaker 7: for that segment of the business change over the remaining nine, nine months that you guys have to report.
Speaker 3: Yes, so the increase on the air inside there does reflect you one, but also reflect the larger, least portfolio size we have going into the beginning of Q2. And that that carried in through the remainder of the year relative to our initial expectations. The other thing that's two areas where we've updated our view.
Speaker 3: One on the right-off. I hit it, Douglas and Steve Austin hit on this as well. Great, continued momentum in the benefit of our police decision changes over the last year. And so, if you can see it clearly in the 32 plus day non-renewal rate that we're now disclosing and tracking that over the last year, as compared to the prior year.
Speaker 3: So, the continued benefit of the RIDOS is part of what we're continuing the factor in, as well as the cost control initiatives that we've really linked into this year were seeing good results there. So, all three of those put together is helping contribute to that increase on air, especially the site. Now, I guess the counter is with the portfolio side coming in better, you know, RIDOS coming in better. So, the RIDOS is helping contribute to that increase on air, especially the cost control initiatives that we've been working on.
Speaker 2: trends over the last, you know, 12 to 18 months. Yeah, hey, Bob, you're still going to say they all said to that is demand pressure. You know, we continue to see.
Speaker 2: demand pressure in the first quarter and that has persisted through April . So we have tweaked our demand assumptions down in the first half of the year incrementally from our original outlook leaving the second half of the year alone. As we think while the second half of the year will be down year over year, there will be slight improvement there relatively speaking. But you know we continue to look at industry data. We look at what we're seeing in our data.
Speaker 3: credit. So were that to happen, that could kind of counteract balance that demand pressure that that Douglas had mentioned before. So, just another thing to kind of keep in mind in terms of potential upside going forward. Yeah, I would say the last thing is based on Kyle's original question to the extent we continue to see lower ride offs. We.
Speaker 2: reduced lease approval rates by several hundred basis points year over year. And to the extent those low write offs continue, that is also an opportunity for us. We're going to lose the mayor and come around to this.
Speaker 7: Thank you. That's helpful too. I guess I guess Kelly on the subject of trade down, you know, none assume going forward. Have you seen any signs that it might be coming or did you see a little bit, you know, in one queue that gives you kind of hopes that maybe we're entering this period that you credit actually is going to tighten the tiny bit. Either from an application standpoint or your customer bands that are applying or anything like that. Yeah, Bobby, let's say as of right now, we're not seeing an increase in the band.
Speaker 2: from credit tightening above us, either at Aarons or GrandSmart. It's really tough to gauge what's going on right now. It seems to me that things are getting tougher with the prime and near prime consumer. And as Kelly says, should credit tighten above us, default rates increase, and so on and so forth. So, I think that's a really good question. I think that's a really good question. I think that's a really good question.
Speaker 2: credit get restricted, we believe that our market will expand. We get external data every day. We run that through our Lease Decisioning Committee and we're looking at what's coming into our funnel. We have not seen evidence of that. We see some slight evidence of demand coming in from our peer group, I would say, with lower approval rates but not necessarily from above.
Speaker 2: And of course, the near prime consumer is their savings rates, diminishing credit increases. Those will be important factors, but we'll continue to keep you updated on that.
Speaker 7: Absolutely, well, I appreciate the details. Best of luck here going forward. Thank you. Thanks, Bobby. Thank you. Thank you. Thanks, Bobby.
Speaker 4: As a reminder to ask your question today, please dial star one on your telephone keypad now. And the next question is from the line of Scott Scarelli of Truist. Scott please go ahead your line is open. Hey good morning guys this is JoJo L.O. and for Scott thanks for taking my question. I just wanted to dive a little deeper into the 170 basis points of quenchill improvement in write-offs and how should you think about the full-year guidance I think last time you guys said five and a half to six and a half percent for this
Speaker 3: lower end of that now, but just given some of the volatility right we've seen over the last four quarters, we're not ready to tighten that range, but certainly based on what we're seeing in terms of the results in charge of and right off and the 32 plus day non-reual rates from the