Aaron : Q3 2023 Earnings Transcript

CORRECTED

10 - 24 - 2023

The Aaron's Company Inc.

Q3 2023 Earnings

TOTAL PAGES: 14

The Aaron's Company Inc.

Q3 2023 Earnings

CORPORATE SPEAKERS:

Marc Levee

The Aaron's Company, Inc.; Vice President of Finance and Investor Relations

Douglas Lindsay

The Aaron's Company, Inc.; Chief Executive Officer

Steve Olsen

The Aaron's Company, Inc.; President

Kelly Wall

The Aaron's Company, Inc.; Chief Financial Officer

PARTICIPANTS:

Kyle Joseph

Jefferies; Analyst

Robert Griffin

Raymond James; Director, Equity Research

Joseph Civello

Truist Securities; Analyst

Jason Haas

Bank of America; Vice President, Equity Research

PRESENTATION:

Operator: Welcome to The Aaron's Company Third Quarter 2023 Results Call. (Operator Instructions). I would now like to pass the conference over to our host, Marc Levee, Vice President of Finance and Investor Relations, to begin. Marc, please go ahead, whenever you're ready.

Marc Levee: Thank you. And good morning, everyone. Welcome to our third quarter 2023 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.

The Aaron's Company Inc.

Q3 2023 Earnings

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 third quarter results and full year 2023 outlook. 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.

The 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, 2022 and 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 will 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, Marc. And good morning, everyone. Thank you for joining us today and for your interest in The Aaron's Company. Before we discuss the results of the third quarter, I would like to mention some exciting leadership announcements. On September 13th, we announced the appointment of Wali Bacdayan and Kris Malkoski to our Board of Directors, effective October 1st. Wali and Kris have a wealth of knowledge and experience, and I know they will be great additions to our Board.

Also on September 13th, we announced the appointment of Russ Falkenstein to Chief Operating Officer of Lease-to-Own. Russ joined the company in 2016 and has served in a

The Aaron's Company Inc.

Q3 2023 Earnings

number of senior leadership roles. In his new role, he will oversee all Lease-to-Own operations at Aaron's and BrandsMart Leasing.

I'm also very excited to announce that we held a grand opening celebration for our new BrandsMart Store in Augusta, Georgia on October 21st. This is the first new store we've opened since we acquired the company in April of last year. We are delighted to bring the BrandsMart experience to the Augusta community, and we look forward to delivering exceptional value and service to our customers in this new market.

Now turning to the results of the third quarter. I'm pleased to report that we delivered consolidated earnings that exceeded our internal expectations.

We benefited from the lease decisioning enhancements in the Aaron's business and continued progress on our cost optimization initiatives at both Aaron's and BrandsMart. We achieved these results despite ongoing challenges in customer demand for the big ticket and discretionary products we carry.

In the Aaron's business, we ended the quarter with revenues and earnings above internal expectations primarily due to a larger-than-expected lease portfolio size, combined with lower write-offs.

We also made great progress on our market optimization initiatives including adding more GenNext stores and expanding our Hub and Showroom program, while continuing to grow our e-commerce channel.

As we look to the fourth quarter of this year and enter 2024, we expect the challenging demand trends to persist. In this environment, we remain focused on growing our market share through delivering a best-in-class customer experience, including flexible payment options, low prices and a broad product selection. We are also excited about the next evolution of our lease decisioning model, which we believe will enhance the customer experience and lead to higher approval rates. Steve will share more details about this initiative in a minute.

The Aaron's Company Inc.

Q3 2023 Earnings

I'm pleased with the progress we're making on our Aaron's multi-year strategic plan, and I remain encouraged about our ongoing transformation and the investments we're making to drive future growth.

Now turning to BrandsMart. We remain confident in BrandsMart's compelling value proposition and our long-term strategic growth opportunities, including expanding into new markets and growing our e-commerce channel.

Although demand is challenging, we remain focused on optimizing profitability through enhanced cost controls and strategic procurement and pricing actions. While doing this, we are also continuing to enhance our capabilities in merchandising, marketing and technology to position the business for long-term growth. Now, I'll turn the call over to Steve to provide more details about both Aaron's and BrandsMart.

Steve Olsen: Thanks, Douglas, and good morning, everyone. The Aaron's business delivered revenues for the third quarter that exceeded our internal expectations despite the ongoing challenges in customer demand. Lease merchandise deliveries were down 4.5% year-over-year. This is an improvement over last quarter of approximately 580 basis points. The year-over-year change was largely due to fewer lease applications in the quarter, actions we took to tighten lease decisioning in prior quarters, and approximately 3% fewer company-operated stores as compared to the beginning of the prior year quarter.

In addition, we continue to see pressure on our average ticket as customers trade down to lower-priced items across all major categories. Our lease portfolio ended the quarter with a value of $116.4 million. This was 7.5% lower than the prior year quarter, but larger than we expected due to fewer lease agreements churning out of the portfolio.

Now moving to our key lease renewal metrics. The lease renewal rate for the quarter was 86.2% for all company-operated Aaron's stores. This rate was down approximately

10 basis points year-over-year. Our 32-plus day non-renewal rate was 2.6% at the end of the third quarter. This was an improvement of 30 basis points year-over-year. This also reflects a sequential increase of 10 basis points from the prior quarter, primarily due to normal seasonal trends.

The Aaron's Company Inc.

Q3 2023 Earnings

We are pleased with enhancements to our lease decision model, which we believe continue to contribute to improvements in our write-offs.Write-offs as a percentage of lease revenues were 6.1%, which is an improvement of 140 basis points versus the prior year quarter.

Now turning to our important strategic growth initiatives for the Aaron's business. Our GenNext store strategy continues to deliver meaningful financial performance through the transformation of our in-store customer experience and operating model.

In the quarter, we opened 15 GenNext stores, bringing the year-to-date total to 34 stores and 245 company-operated GenNext stores since launching the program. At the end of the quarter, these stores accounted for over 30% of our lease revenues and retail sales. This compares to just over 22% in the prior year quarter. In addition, we are pleased with our progress in executing the new Hub and Showroom program. We now have 111 showrooms in the chain and are achieving the expected cost savings. As we continue to evolve our GenNext strategy, I'm excited to report that we are now opening Aaron's stores in new markets. This includes three GenNext stores and one showroom opened in new markets so far this year.

Now turning to the Aaron's e-commerce channel. We continue to focus on improving our digital marketing strategies, enhancing the online shopping experience and expanding the assortment with over 10,400 products on aarons.com.

In the third quarter, revenues generated from leases initiated on aarons.com increased 1.3% year-over-year and now represent 18.5% of total lease revenues as compared to 16.2% in the prior year quarter. Recurring revenue written into the portfolio from e- commerce decreased 6.8% compared to the prior year quarter. We believe the decrease resulted from tighter lease decisioning in prior quarters and lower average ticket.

We continue to see growth in our new weekly payment option, both in stores and on aarons.com. As a reminder, we rolled out this option in stores in Q3 of last year and on aarons.com last quarter. We are excited to provide enhanced flexibility to our customers through our new weekly payment options, and we believe our compelling lease rates will help us gain market share over time.

The Aaron's Company Inc.

Q3 2023 Earnings

In addition, we are excited about enhancements to our lease decisioning model rolled out earlier this month. Customers are now able to shop across all of our channels by submitting just one lease application, and we now approve all customers through a consistent lease decision model. We believe these enhancements will streamline the customer experience, lead to higher approval rates and improve conversion of lease applications.

Now turning to BrandsMart. We are very excited about the recent opening of our first new store in Augusta, Georgia. This store showcases our new brand image and a more modern store layout. I want to extend my thanks to all of our team members who worked tirelessly to launch this new store. I am proud of what we achieved, and I look forward to serving customers in this new market.

Turning to our third quarter performance. As Douglas mentioned, we continue to operate in a challenging customer demand environment. As a result, BrandsMart's comparable sales were down 17% year-over-year. This was a result of ongoing weaker customer traffic and customer trade down to lower-priced products, primarily in major appliances, TVs and computers.

As we work to attract new BrandsMart customers, we continue to invest in our e- commerce channel and digital marketing strategies.

Consistent with overall sales performance, we experienced pressure in our e-commerce channel. E-commerce product sales represented 8.9% of total product sales, down from 9.3% in the prior year quarter.

We continue to focus on optimizing profitability of the business. For the third quarter, our product gross margin improved by approximately 80 basis points as compared to the prior year quarter. This was a result of direct procurement savings and strategic pricing actions.

As we move into the holiday season and look ahead into 2024, we remain focused on achieving transaction synergies and positioning the business for future growth. Now I'll turn the call over to Kelly to provide further details on our financial performance.

The Aaron's Company Inc.

Q3 2023 Earnings

Kelly Wall: Thanks, Steve. We filed our Form 10-Q, earnings release and investor presentation yesterday after the market closed, and 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. Also, unless stated otherwise, any comparisons I make to prior periods will be on a year-over-year basis.

Consolidated revenues for the third quarter of 2023 were $525.7 million, compared with $593.4 million. This year-over-year decrease is primarily due to the expected lower lease revenues and fees and retail sales at the Aaron's business and lower retail sales at BrandsMart.

Consolidated adjusted EBITDA was $25.3 million compared with $38.2 million. This year- over-year decrease is primarily due to the lower revenues at both business segments, partially offset by lower personnel costs at both business segments and lower write-offs at the Aaron's business. As a percentage of total revenues, adjusted EBITDA was 4.8% compared to 6.4%. On a non-GAAP basis, earnings per share were $0.01 compared to earnings of $0.31.

Adjusted free cash flow was $7.8 million, a decrease of $42.3 million. This decrease was driven by lower cash provided by operations and having generated $7.5 million of proceeds from real estate transactions in the prior year quarter. On a year-to-date basis, adjusted free cash flow was $86.4 million, an increase of $18.5 million. This increase is largely driven by higher cash provided by operations as we have executed on our cost optimization initiatives and managed merchandise inventory levels at both businesses to reflect the soft demand environment.

During the quarter, we continued to return capital to shareholders, paying $3.9 million in dividends and repurchasing about $5.7 million of the company's common stock.

In addition, we ended the third quarter with $39.3 million of cash and $187.5 million of debt. Our net debt balance at the end of the quarter was $148.1 million, and our net debt to adjusted EBITDA leverage ratio ended the quarter at 1x.

The Aaron's Company Inc.

Q3 2023 Earnings

Turning to our updated outlook. In the third quarter earnings release, we provided an update to our full year 2023 outlook. This updated outlook reflects our expectation that total revenues for the consolidated company will be between $2.12 billion and $2.17 billion. We have updated revenues to incorporate our consolidated results in the first three quarters of 2023 and to also reflect expected lower product sales at BrandsMart for the year as compared to our prior outlook.

We have narrowed the range of our outlook for adjusted EBITDA and non-GAAP EPS for the consolidated company. We expect adjusted EBITDA to be between $140 million and $150 million. We expect non-GAAP EPS to be between $1 and $1.20. The lowered midpoint for both reflects that we no longer expect to close a planned sale leaseback transaction for a group of Aaron's stores by the end of the year. The revised outlook also includes the continued lower demand we are experiencing at BrandsMart. And finally, we have lowered our adjusted free cash flow outlook, which is also impacted by the timing of the sale leaseback.

And with that, I will now turn the call over to the operator for Q&A.

Operator: (Operator Instructions) Our first question today comes from the Kyle Joseph from Jefferies. Kyle, your line is now open. Please go ahead whenever you're ready.

Kyle Joseph: Just starting on the revenue headwinds at, call it, either business. I just want to see if you're seeing any sort of strength in certain verticals, ongoing weakness in others? Trying to get a sense if consumer electronics are showing any signs of life, given that they probably have the shortest product cycle?

Douglas Lindsay: Kyle, it's Douglas. I think we said at the Aaron's business, our deliveries were down about 4.5%. Of that 4.5%, about half was really decisioning related and lower store count and the other half was demand.

So in The Aaron's business, while we're seeing fewer applicants, we're also seeing a higher conversion rate. I'm really proud of what the team has done there to convert customers, and we're seeing a bit more strength in the customer there, albeit a down cycle.

The Aaron's Company Inc.

Q3 2023 Earnings

We're also seeing customers choosing lower price points across most major categories, especially in television and that's consistent with BrandsMart as well. We're really seeing our customers generally looking for deals in both businesses, and you'll see us be promotional during the holiday periods, which we have been, but we're seeing that driving more of our demand in this demand cycle. I'll let Steve talk specifically about categories to the second part of your question.

Steve Olsen: I'll talk first about the Aaron's business. They definitely saw some growth in some categories. So on the appliance side, growth in laundry and ranges and on the furniture side, upholstery and have a flat business in mattresses. So definitely some growth areas. On the declining side, up against some pretty surging demand last year in gaming and then continued pressure in TV, computers and bedroom.

So on the BrandsMart side, the best-performing category, which is still a slight negative, is small appliances and home goods, followed by audio and video and security and the categories that are most under pressure being appliances, TVs and computers.

So to answer your question on consumer electronics, seeing some improvement, that being slight mid-single-digit negatives in audio, in video and security, but TVs continue to be under pressure. And the only really growth area we've seen in TVs, as Douglas referenced, is really in that opening price point. So seeing some improvement in the opening price points in consumer electronics, but just not enough to offset the overall demand.

Kyle Joseph: Got you. And then tied to that, shifting over to credit. Obviously, you saw a good decline year-over-year in write-offs, but just give us an update on the kind of the health of the underlying consumer. I mean, obviously, light demand and there's a number of factors driving that. But in terms of credit, it seems like they're relatively sound, but just kind of an update on the health of your underlying consumer.

Douglas Lindsay: Yes. I mean we're -- I think the consumer has been pretty resilient. I mean we noted that despite having fewer applicants and the fact that we're approving less by several hundred basis points year-over-year, we're really controlling our renewals process. So 30-daynon-renewed was down 30 basis points year-over-year.Write-offs were down 140 basis points.