The Aaron's Company, Inc. (AAN) Q4 2023 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents mixed signals: Aaron's shows positive growth in ecommerce and cost reductions, but BrandsMart faces sales declines and margin pressure. The Q&A highlights optimism for Aaron's lease portfolio growth and cost control but reveals uncertainties about BrandsMart's recovery timeline and ecommerce's long-term margin impact. Given these mixed elements, the stock reaction is likely to be neutral.

Key Financial Performance

Consolidated Revenues (Q4 2023) $529.5 million, down 10.2% from $589.6 million in Q4 2022 due to lower lease revenues and fees at the Aaron's business and lower retail sales at BrandsMart.

Consolidated Adjusted EBITDA (Q4 2023) $22.4 million, down 25% from $29.9 million in Q4 2022, primarily due to lower revenues at both business segments, partially offset by lower total consolidated operating expenses.

Non-GAAP Diluted Loss Per Share (Q4 2023) $0.26 loss compared to earnings of $0.09 in Q4 2022, reflecting the overall decline in earnings.

Adjusted Free Cash Flow (Q4 2023) $15.9 million, a decrease of $8.8 million year-over-year, driven by lower earnings and higher inventory purchases.

Consolidated Revenues (Full Year 2023) $2.14 billion, down 4.9% from the previous year due to lower lease revenues and fees and retail sales.

Adjusted EBITDA (Full Year 2023) $136 million, down from $177.1 million, primarily due to lower revenues.

Non-GAAP Diluted Earnings Per Share (Full Year 2023) $0.81 compared to $2.07 in the previous year, reflecting the decline in earnings.

Net Debt (End of 2023) $135 million, a reduction of over 37% from $215 million at the end of 2022.

Cash Balance (End of 2023) $59 million, with total debt of $194 million, representing a $79.8 million reduction from the end of 2022.

Lease Portfolio Size (End of Q4 2023) $117.7 million, down 7% year-over-year due to ongoing challenging demand trends.

Lease Renewal Rate (Q4 2023) 85.2%, down approximately 60 basis points year-over-year.

Write-offs as a Percentage of Lease Revenues (Q4 2023) 6.5%, an improvement of 60 basis points versus the prior year quarter.

BrandsMart Comparable Sales (Q4 2023) Down 14% year-over-year due to weaker customer traffic and trade down to lower-priced products.

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Operating Highlights

New Omnichannel Lease Decisioning Program: Launched a new omnichannel lease decisioning and customer acquisition program that allows ecommerce customers to shop across all channels, leading to higher conversion rates.

Ecommerce Growth: Ecommerce channel revenue increased over 100% year-over-year, with expectations to represent over 30% of total recurring revenue in 2024.

GenNext Stores: Opened 9 GenNext stores in Q4 2023, totaling 43 for the year, which now account for over 32% of lease revenues.

Market Expansion: Plans to open approximately 20 GenNext stores in 2024, including 5 to 10 in new markets.

BrandsMart Market Positioning: Despite challenges, BrandsMart is expected to improve demand in the second half of 2024.

Cost Reductions: Achieved over $40 million in cost reductions in 2023, exceeding targets.

Store Support Center Personnel Reduction: Reduced store support center personnel by approximately 15% in Q1 2024.

Strategic Focus: Management is committed to transforming the Aaron's business and enhancing BrandsMart, focusing on cost control and operational efficiencies.

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Risk or Challenges

Economic Factors: The company is facing headwinds from elevated levels of inflation, low housing starts, and increased consumer debt, which are impacting customer demand.

Competitive Pressures: BrandsMart is experiencing softness in customer demand due to lower customer traffic and a trade down to lower-priced products across major product categories.

Supply Chain Challenges: The company is investing in higher levels of lease merchandise and merchandise inventories to meet increased demand, which may impact cash flow.

Regulatory Issues: The company has not specifically mentioned regulatory issues, but the mention of forward-looking statements and cautionary notes suggests potential regulatory risks.

Operational Risks: The lease portfolio size at the Aaron's business is down 7% year-over-year, which may affect revenue and profitability.

Financial Performance Risks: Consolidated adjusted EBITDA was down year-over-year, and the company expects first quarter consolidated adjusted EBITDA to be lower year-over-year, indicating potential financial performance risks.

Market Demand Risks: The company anticipates continued pressure on demand at BrandsMart through the first half of the year, which could impact overall sales performance.

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Guidance & Outlook

Cost Reductions: Delivered over $40 million of cost reductions in 2023, exceeding the high end of the target range.

Lease Decisioning Technology: Enhanced lease decisioning technology and customer acquisition programs leading to improved customer experience and higher conversion rates.

GenNext Stores: Opened 9 GenNext stores in Q4 2023, totaling 43 for the year, which accounted for over 32% of lease revenues.

Ecommerce Growth: Ecommerce channel lease revenues increased 10.4% year-over-year, expected to represent over 30% of total recurring revenue in 2024.

Store Support Reduction: Reduced store support center personnel by approximately 15% in Q1 2024.

2024 Revenue Outlook: Expect total revenues for 2024 to be between $2.055 billion and $2.155 billion.

2024 Adjusted EBITDA Outlook: Expect adjusted EBITDA for 2024 to be between $105 million and $125 million.

2024 Non-GAAP EPS Outlook: Expect non-GAAP EPS to range from a loss of $0.10 to earnings of $0.25 per share.

2024 Adjusted Free Cash Flow Outlook: Expect adjusted free cash flow to be between $15 million and $30 million.

Lease Portfolio Growth: Expect lease portfolio size to grow mid-single digits in 2024, starting from a 7% lower size at the beginning of the year.

Q1 2024 Performance: Expect Q1 2024 to be a net loss and lower year-over-year adjusted EBITDA, representing roughly 20% of total adjusted EBITDA for the year.

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Shareholder Return Plan

Quarterly Dividend: The company announced a quarterly dividend of $0.125 per share, payable on April 3 to shareholders of record as of March 14.

Share Repurchase: In 2023, the company repurchased approximately $6.5 million of its common stock.

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Key Q&A

Q:Does the underlying earnings stream that we're used to in this business look different?

A:We're seeing really strong signs in our new customer acquisition program, benefiting both ecomm and stores. Ecomm was up 60% in recurring revenue, and we expect it to track over 100% in the first quarter. The business is changing, but we believe we're managing risk appropriately and driving incremental revenue and earnings.

Q:Does the change in composition affect the historical margin profile of the business?

A:Growth in ecomm is putting pressure on margin due to lower lease renewal rates and higher write-offs. However, as the lease portfolio grows, we expect more gross profit flow-through, which will help overall EBITDA margins.

Q:What are you seeing regarding tax refunds this season?

A:Tax season has started a bit delayed, but we expect similar payment activity and early purchase options as last year.

Q:Is there further cost to be removed at BrandsMart to maintain the EBITDA profile?

A:We're looking to optimize the cost structure, but ultimately, it's about top-line demand. We believe in the growth opportunity at BrandsMart and expect demand to improve in the second half of the year.

Q:What is driving the variance in performance between Aaron's and BrandsMart?

A:It's a combination of factors, including the nature of durable goods and the customer mix. Aaron's has a more consistent revenue stream due to lease renewals.

Q:Any changes to underwriting or outlook for the health of your consumer?

A:No significant changes. We continue to optimize our decisioning model and have confidence in our customer base's resilience.

Q:Can you talk about the recovery expected in the second half for BrandsMart?

A:We expect demand pull forward from the pandemic to release, which should help with sales, especially in durable categories.

Q:Any trends regarding higher income credit customers shopping?

A:We haven't seen material changes in Aaron's customer base, but BrandsMart is experiencing tighter credit standards.

Q:Review of Unclear Management Responses

A:Management did not provide a clear answer regarding the specific drivers of the variance in performance between Aaron's and BrandsMart, using vague language about a combination of factors without detailed data.

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Earnings Word Cloud

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