The Aaron’s Company, Inc. (NYSE:AAN) Q1 2024 Earnings Call Transcript

The Aaron’s Company, Inc. (NYSE:AAN) Q1 2024 Earnings Call Transcript May 7, 2024

The Aaron’s Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to the Aaron’s Company Q1 2024 Earnings Call. My name is Angela, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Marc Levee, Vice President, Finance and Investor Relations. Please go ahead.

Marc Levee: Thank you, and good morning, everyone. Welcome to our first quarter 2024 earnings conference call. Joining me today are Aaron’s Chief Executive Officer, Douglas Lindsay; President, Steve Olsen; and Chief Financial Officer, Kelly Wall. After our prepared remarks, we will open the call for questions. Yesterday, after the market closed, we posted our earnings release on the Investor Relations section of our website at investor.aarons.com. We also posted a slide presentation that provides additional information about our first quarter 2024 results. During today’s call, certain statements we make may be forward looking, including those related to our outlook for this year. For more information, including important cautionary notes about these forward-looking statements, please refer to the safe harbor provision that can be found at the end of the earnings release.

Safe harbor provision identifies certain risks and uncertainties 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, 2023, and our other 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, in the earnings release, and in the supplemental investor presentation, we refer to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, non-GAAP net earnings, non-GAAP EPS, adjusted free cash flow and net debt, 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. With that, I will now turn the call over to our CEO, Douglas Lindsay.

Douglas Lindsay: Thanks, Mark. Good morning, everyone. Thank you for joining us and for your interest in The Aaron’s Company. Our performance in the first quarter was in line with our guidance, and I’m encouraged by the positive momentum that I’m seeing in the business so far this year. In The Aaron’s business, we continue to significantly grow our e-commerce channel, driven by our new omnichannel lease decisioning and customer acquisition program that we launched in Q4 of last year. Due to the seasonal trends in the lease-to-own business, it’s common for our lease portfolio size to decrease in the first quarter. This year, we experienced the smallest decrease in a decade. This improvement was driven by the actions we’ve taken to generate year-over-year growth in lease merchandise deliveries across all major categories.

At BrandsMart, we exceeded our top and bottom line expectations for the quarter despite continued demand pressure. While comparable sales remained negative, we did experience sequential improvements in demand each month in the first quarter. Based on our first quarter performance and the trends across both businesses, we are reaffirming our full year 2024 outlook provided on February 26 for revenues and adjusted EBITDA, and we are raising our outlook for non-GAAP diluted EPS due to a lower estimated tax rate. Kelly will speak to this in more detail in a few minutes. Now turning to the results of the first quarter. I’m pleased to report that we delivered consolidated revenues and adjusted earnings in line with expectations. At the Aaron’s business, our lease merchandise deliveries increased 6.8% as compared to the prior year period.

This led to year-over-year growth in recurring revenue written into the portfolio. We continue to close the gap from the beginning of the year with our lease portfolio size ending the quarter down 4.8% after starting the year down 7%. On a same-store basis, our lease portfolio size ended the quarter down only 1.4%. This momentum has continued into April with our lease merchandise deliveries up 18.6% year-over-year, driven by over 115% e-commerce growth. At the end of April, our same-store lease portfolio size was down only 20 basis points as compared to the prior year period. I’m happy to report that we’ve seen further improvement in May, and we’ve reached an inflection point where our same-store lease portfolio size is now larger than it was the same time last year.

We remain excited about our new omnichannel lease decisioning and customer acquisition program, which provides leasing power to all Aaron’s customers. As highlighted last quarter, this program is driving significantly higher conversion rates of lease applications, and we continue to expect it to drive mid-single-digit growth in our total lease portfolio size by end of the year. Now turning to BrandsMart. While profitability remains challenging, BrandsMart ended the quarter with revenues and adjusted earnings slightly above our internal expectations with the sequential quarterly improvement in comparable sales. We continue to expect improvements to customer demand in the second half of the year, primarily due to an anticipated rebound in our major product categories.

We are also continuing to enhance our capabilities in merchandising, marketing and technology to better position the business for long-term growth. Although the broader demand environment is still challenging, we remain confident in BrandsMart’s compelling value proposition and potential to expand to new markets. Before I turn the call over to Steve, I want to reiterate how encouraged I am by the customer demand trends we’re seeing in the Aaron’s business. As I just mentioned, we have reached an inflection point where our same-store lease portfolio size is now larger than it was at the same time last year. We expect this to lead to incremental flow-through to profitability, benefiting earnings in the second half of the year and into 2025. I will now turn the call over to Steve to discuss operational performance of each business segment.

Stephen Olsen: Thanks, Douglas, and good morning, everyone. In the first quarter at the Aaron’s business, lease merchandise deliveries increased approximately 7% year-over-year and over 10% on a same-store basis. Our new omnichannel lease decisioning and customer acquisition program drove year-over-year growth in our major product categories of appliances, furniture and consumer electronics. The success of this program gives us confidence that we are winning share in the market. Our lease portfolio size ended the quarter at $116.1 million. As Douglas mentioned, this is one of the best first quarters we’ve experienced in a decade. The portfolio declined only $1.7 million as compared to a decline of $4.6 million in the first quarter of 2023 and a decline of $4.5 million in 2022.

Now moving to our key lease renewal metrics. The lease renewal rate for the quarter was 87.4% for all company-operated Aaron’s stores. This rate was down approximately 110 basis points year-over-year due to the increasing mix of e-commerce agreements written into the portfolio. Our 32-plus day nonrenewal rate was 2.2% at the end of the first quarter, which was up 60 basis points year-over-year, but improved 50 basis points from the last quarter. During the quarter, we also continued to improve our lease decision technology to enhance controls to mitigate risk. We believe this will generate improvements in write-off over time. In the first quarter, write-off to the percentage of lease revenues were 5.9%, which was up 50 basis points versus the prior year quarter, but improved 60 basis points from last quarter.

As we mentioned last quarter, we do expect write-offs to be higher than our historical average due to the ongoing strong demand trends. As a reminder, in periods of high growth in merchandise deliveries, we incur inventory purchases, marketing costs, sales-based incentive compensation, and write-offs in advance of revenue recognition due to the portfolio nature of the business. Now turning to our strategic growth initiatives for the Aaron’s business. Our market optimization strategy, which includes our GenNext stores and hub and children program continues to improve our in-store customer experience and operating model. In the first quarter, we opened 11 GenNext stores, including three in new markets, bringing the total to 265 company-operated GenNext stores since launching the program.

At the end of the quarter, these stores accounted for more than 33% of our lease revenues in retail sales. That compares to over 26% in the prior year quarter. Now turning to the Aaron’s e-commerce channel. As Douglas mentioned, we continue to experience significant growth in this channel. In the first quarter, revenues generated from leases initiated on Aarons.com increased 20.8% year-over-year and now represent 24% of total lease revenues as compared to approximately 18% in the prior year quarter. Recurring revenue written into the portfolio from e-commerce increased over 94% year-over-year and represented approximately 34% of total recurring revenue written in the quarter. As Douglas mentioned earlier, we are excited about the momentum and positive trends that we are seeing in the Aaron’s business, which have continued into the second quarter.

With the ongoing enhancements we are making to the business, combined with our compelling lease rate and flexible payment options, we are confident that we are attracting new customers and gaining market share. Now turning to BrandsMart. Despite the challenging customer demand environment for our product categories, BrandsMart experienced sequential improvement comparable sales during the quarter, which we believe will continue to improve through the rest of the year. BrandsMart continued to experience weaker customer traffic and trade down to lower-priced products in our key product categories of major appliances and consumer electronics. We also experienced credit tightening with our private label credit card provider. As a result of these trends, comparable sales for the quarter were down 9.4% year-over-year.

However, this is a 460-basis point improvement from the last quarter. We continue to invest in our e-commerce shopping experience and digital marketing strategies to attract new customers. We are optimistic that our investments in e-commerce will lead to growth in this channel as customer demand rebounds later this year. I also want to mention that our business-to-business sales experienced significant growth in the first quarter, and we are focused on growing this channel. Now turning to our strategic initiatives at BrandsMart. We are continuing to focus on improving our in-store shopping experience by rationalizing our product assortments and expanding our furniture product mix to attract new customers. In addition, we are excited about opening another new store later this quarter in Kennesaw, Georgia.

The store will be similar in size and format to the new store that we opened in Augusta last year. We are looking forward to expanding BrandsMart’s footprint and offering our compelling value proposition to more markets and customers. Now I’ll turn the call over to Kelly to provide further details on our financial performance for the quarter.

Kelly Wall: Thanks, Steve. We filed a Form 8-K after the market closed yesterday, which included our earnings release, investor presentation and additional information. We also filed our Form 10-Q for the quarter. These documents can be found on our Investor Relations website. Please refer to these documents for additional detail regarding our financial performance and outlook for the consolidated company and the two business segments. Unless otherwise stated, any comparisons I make to prior periods will be on a year-over-year basis. Consolidated revenues for the first quarter of 2024 were $511.5 million compared to $554.4 million. This year-over-year decrease is primarily due to lower lease revenues and fees at the Aaron’s business and lower retail sales at BrandsMart.

Consolidated adjusted EBITDA was $22.7 million compared to $45.9 million. This year-over-year decrease is primarily due to lower revenues at both business segments and higher other operating expenses and write-offs, partially offset by lower personnel costs. Other operating expenses were higher primarily due to increased investments in advertising. As a percentage of total revenues, adjusted EBITDA was 4.4%, and on a non-GAAP basis, loss per share was $0.15. Adjusted free cash flow was a $33.2 million use of cash, lower than Q1 of the prior year, but favorable to our internal expectations. The year-over-year decrease was primarily driven by higher purchases of lease merchandise inventory to support the growth in new agreement deliveries at the Aaron’s business and lower consolidated earnings.

This was partially offset by higher proceeds from real estate transactions. During the first quarter, the company paid $3.8 million in dividends. At the end of the quarter, the company had a cash balance of $41 million and total debt of $212.9 million, which were both favorable to our expectations. Now turning to our 2024 outlook. As Douglas mentioned, based on our performance so far this year and the trends we’re seeing in the business, we are reaffirming our full year outlook for revenues and adjusted EBITDA. We are raising outlook for non-GAAP diluted EPS due to a lower estimated effective tax rate. The revised estimated effective tax rate is approximately 38%, 12 percentage points lower than the prior guidance we provided last quarter. Full year provision for lease merchandise write-offs is still expected to be between 6% and 7% of lease revenues and fees.

Before I hand the call back to Douglas, I want to review our capital allocation priorities. These priorities have not changed from our prior earnings call. We continue to focus on investing in the Aaron’s Business and BrandsMart to drive revenue and earnings growth while maintaining a conservative leverage profile of 1x to 1.5x net debt to adjusted EBITDA. After this, we look to return capital to the shareholders through dividends and share repurchases, and we’ll continue to evaluate acquisitions on an opportunistic basis. As it relates to returning capital to shareholders, yesterday we announced our quarterly dividend. We will pay $0.125 per share on July 3 to shareholders of record as of close of business on June 14. Now I’ll hand it back to Douglas to make a few remarks before we turn to Q&A.

Douglas Lindsay: Thanks, Kelly. As we look to the remainder of 2024 and beyond, I want to reiterate that our management team and board remain highly engaged and committed to taking all actions that will deliver additional value for our shareholders. We continue to execute our multiyear strategic plan, driving efficiencies and innovating our business to better serve our customers. I’m confident that the investments we are making will continue to enhance our distinct competitive advantages and allow us to increase market share at both Aaron’s and BrandsMart. And with that, I will now turn the call over to the operator for Q&A.

Operator: Thank you, Douglas. [Operator Instructions] We have the first question from Bobby Griffin with Raymond James. Your line is open.

Alessandra Jimenez: Good morning. This is Alessandra Jimenez on for Bobby. Thank you for taking our question.

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Q&A Session

Douglas Lindsay: Good morning.

Alessandra Jimenez: Maybe first on the store optimization efforts at Aaron. So we saw acceleration store closures in 1Q. Can you talk about how your store optimization efforts are progressing and then any updated thoughts on the right level of store count moving forward?

Douglas Lindsay: Yes, Alessandra. Thanks for the question. As we stated previously, we continue to try to rationalize markets and lower our cost base in each market. And we’re doing that, as you can see, through growing our e-com portfolio, but also make sure that we’re serving our customers in as strong a way as we can in each market. And so in doing that, we’re constantly assessing through our real estate committee the right number of stores. The right position of those stores. So we did open 11 GenNext stores in the quarter, but we also closed 30 to 40 stores within the time frame. We continue to do that over the course of the year. We’re not going to state a number in terms of the number of stores that we will ultimately close.

All I’ll say is that we’re continuing to optimize our markets to best serve our customers and to be as cost efficient in those markets as possible. One thing we’re super excited about is that we’re now opening incremental net and new stores, both in full stores and showrooms. And we think the showrooms in particular are a very efficient way to cover the markets we’re in more thoroughly with lower working capital, smaller footprints, and sort of a more efficient box in terms of profitability.

Alessandra Jimenez: Okay. That’s helpful. Thank you. And then we were pleased with the sequential improvement in the lease portfolio in April and May. Is there anything specific that you noticed to drive that improvement, like traffic, trade-down, anything like that?

Douglas Lindsay: Yes, well, listen, we’re super excited about what we’re seeing in terms of our growth in the portfolio in Q1. As you heard, deliveries are up considerably, and they continue to be year-to-date in the year. The way our business works is that, because of our revenue recognition and cost-a-good soul that we spread over the life of the agreement, we don’t see the ultimate impact of that until later on. And in the current period, we incur things like marketing and incentive-based compensation and near-term write-offs. But as we grow the portfolio, we see flow-through to profitability. We noted that there’s an inflection point that we’re expecting this year that our portfolio starts to turn positive. And with that, once we start to turn positive, which we have in our same-store portfolio, little movements in the growth there mean a lot to the bottom line.

I’ll just give you an example. For every $1 million of portfolio-sized growth we have, we get about $600,000 of gross margin a month. And if you look at that on an annual basis, that equates to about a little over $7 million of gross margin addition. And because of the high operating leverage we have in the business, we see significant flow-through to adjust to the EBITDA after write-offs. So, we’re super excited about that. As we think about the rest of the year, our projections assume not only do we hit an inflection point to growth, but that we grow our total monthly lease portfolio up by the end of the year by mid-single-digits. We believe that will benefit not only the second half of 2024, but the full year of 2025. And as you think about ’25 being up mid-single-digits over – at the end of ’24.

We started 2024 with about a $117 million portfolio size of being up mid-single-digits, by the end of the year, equates to kind of like a $4 million to $8 million increase in portfolio value. And so that’s very meaningful as we enter into, and that’s $4 million to $8 million a month. So that’s very meaningful as we enter into 2025. So, I mean, really what we’re seeing is just great success of this program. We still are in a challenging market in terms of demand for our products, but we are capturing more share of the business that’s coming in, and our customers are wanting to interact with us in a more omnichannel way. We mentioned that e-com is up over 100% in the month of April, and that’s very encouraging as we see this flow through to the bottom line.

Alessandra Jimenez: Okay. Thank you. That’s very helpful. And then maybe just lastly for me switching over to BrandsMart. What gives you confidence to accelerate the top-line growth at BrandsMart as we move throughout 2024 to hit that annual guidance? Is it primarily a factor of just comparisons that you see during the back half on a multi-year basis?

Stephen Olsen: Yes, hi, this is Steve. Yes, exactly what you said. So it is comparisons, definitely some slightly lower comps that we were comping over last year, but as well as the release of the pull forward demand that we’re expecting in the back half of the year. Starting and consume electronics and then moving on to furniture and appliances.

Alessandra Jimenez: All right. Thank you so much. And best of luck here in 2Q.

Stephen Olsen: Thank you.

Operator: Thank you. The next question is from Kyle Joseph with Jefferies. Your line is open.

Kyle Joseph: Hi, good morning, guys. Thanks for taking my questions. Just wanted to talk about margins on leasing or on leases in the quarter. Looks really strong. I’m not sure if that’s a function of buyout activity or kind of GenNext contribution, or what’s the driver there and the outlook for the rest of the year?