The Aaron's Company, Inc. (AAN) Q1 2024 Earnings Call Transcript

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

Overview

The earnings call presents a mixed picture: strong cost reductions and lease portfolio growth are positives, but the expected net loss in Q1 2024, weak EPS guidance, and unclear store optimization plans are concerning. The Q&A reveals optimism in e-commerce growth and lease margins, but also highlights consumer pressure and credit tightening. Overall, these factors balance out, leading to a neutral sentiment.

Key Financial Performance

Consolidated Revenues $511.5 million (decreased from $554.4 million, down 7.5% year-over-year) due to lower lease revenues and fees at the Aaron's business and lower retail sales at BrandsMart.

Consolidated Adjusted EBITDA $22.7 million (decreased from $45.9 million, down 50.6% year-over-year) primarily due to lower revenues at both business segments and higher other operating expenses and write-offs, partially offset by lower personnel costs.

Adjusted EBITDA as a Percentage of Total Revenues 4.4% (decreased from previous year) due to the overall decrease in revenues.

Non-GAAP Loss Per Share $0.15 (compared to prior year) reflecting the overall decrease in earnings.

Adjusted Free Cash Flow $33.2 million use of cash (lower than Q1 of the prior year) primarily driven by higher purchases of lease merchandise inventory and lower consolidated earnings, partially offset by higher proceeds from real estate transactions.

Dividends Paid $3.8 million during the quarter.

Cash Balance $41 million at the end of the quarter.

Total Debt $212.9 million at the end of the quarter.

Lease Portfolio Size $116.1 million (declined by $1.7 million compared to a decline of $4.6 million in Q1 2023) indicating one of the best first quarters in a decade.

Lease Renewal Rate 87.4% (down approximately 110 basis points year-over-year) due to the increasing mix of e-commerce agreements.

32-plus Day Nonrenewal Rate 2.2% (up 60 basis points year-over-year) but improved 50 basis points from the last quarter.

Write-off to Percentage of Lease Revenues 5.9% (up 50 basis points year-over-year) but improved 60 basis points from last quarter.

Comparable Sales at BrandsMart Down 9.4% year-over-year (but improved by 460 basis points from the last quarter).

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Operating Highlights

E-commerce Growth: E-commerce channel significantly grew, with lease merchandise deliveries up 18.6% year-over-year in April, driven by over 115% e-commerce growth.

Omnichannel Lease Decisioning Program: New program launched in Q4 2023 is driving higher conversion rates of lease applications and is expected to lead to mid-single-digit growth in total lease portfolio size by year-end.

BrandsMart Market Expansion: BrandsMart is planning to open a new store in Kennesaw, Georgia, expanding its footprint and value proposition.

Lease Merchandise Deliveries: Lease merchandise deliveries increased 6.8% year-over-year in Q1 2024, with a notable improvement in the lease portfolio size.

Lease Renewal Rate: The lease renewal rate for the quarter was 87.4%, down 110 basis points year-over-year due to a higher mix of e-commerce agreements.

Market Optimization Strategy: Continued focus on enhancing in-store customer experience and operating model through GenNext stores, with 11 new stores opened in Q1.

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Risk or Challenges

Competitive Pressures: BrandsMart experienced weaker customer traffic and a shift to lower-priced products, indicating competitive pressures in the market.

Regulatory Issues: No specific regulatory issues were mentioned, but the company referenced the need to comply with SEC filings and regulations.

Supply Chain Challenges: The company faced challenges with credit tightening from their private label credit card provider, impacting customer financing options.

Economic Factors: The broader demand environment remains challenging, with comparable sales down 9.4% year-over-year for BrandsMart, although there was a sequential improvement.

Write-Offs: Write-offs as a percentage of lease revenues increased to 5.9%, indicating potential risks in lease agreements and customer defaults.

Investment Risks: Higher operating expenses due to increased investments in advertising and inventory purchases could impact profitability.

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Guidance & Outlook

E-commerce Growth: Significant growth in the e-commerce channel, with lease merchandise deliveries up 18.6% year-over-year in April, driven by over 115% e-commerce growth.

Omnichannel Lease Decisioning: The new omnichannel lease decisioning and customer acquisition program is expected to drive mid-single-digit growth in the total lease portfolio size by the end of the year.

Market Optimization Strategy: Continued focus on market optimization strategy, including GenNext stores, which accounted for over 33% of lease revenues.

BrandsMart Expansion: Plans to open a new BrandsMart store in Kennesaw, Georgia, to expand footprint and attract new customers.

2024 Revenue and Adjusted EBITDA Outlook: Reaffirming full year 2024 outlook for revenues and adjusted EBITDA.

Non-GAAP Diluted EPS: Raising outlook for non-GAAP diluted EPS due to a lower estimated effective tax rate, now approximately 38%.

Lease Merchandise Write-offs: Full year provision for lease merchandise write-offs expected to be between 6% and 7% of lease revenues and fees.

Capital Allocation Priorities: Focus on investing in Aaron's and BrandsMart, maintaining a conservative leverage profile of 1x to 1.5x net debt to adjusted EBITDA.

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Shareholder Return Plan

Quarterly Dividend: The company paid $3.8 million in dividends during the first quarter.

Dividend per Share: A quarterly dividend of $0.125 per share will be paid on July 3 to shareholders of record as of June 14.

Share Repurchase: None

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Key Q&A

Q:Can you talk about how your store optimization efforts are progressing and any updated thoughts on the right level of store count moving forward?

A:We continue to rationalize markets and lower our cost base, assessing the right number of stores through our real estate committee. We opened 11 GenNext stores but closed 30 to 40 stores. We're not stating a number for future closures but are focused on optimizing markets.

Q:Is there anything specific that you noticed to drive improvement in the lease portfolio, like traffic or trade-down?

A:We're excited about growth in our portfolio, with deliveries up considerably. We expect an inflection point this year where our portfolio starts to turn positive, which will significantly impact profitability.

Q:What gives you confidence to accelerate the top-line growth at BrandsMart as we move throughout 2024?

A:It's primarily due to comparisons with last year and the release of pull-forward demand expected in the back half of the year.

Q:What is driving the strong margins on leasing in the quarter?

A:The growth in margin is largely driven by higher early purchase option activity and effective risk management in the portfolio.

Q:What kind of trends are you seeing in sales at BrandsMart?

A:We saw growth in the portfolio and attach rate of BrandsMart leasing and retail sales year-over-year.

Q:Can you provide an update on the health of the underlying consumer?

A:The underlying consumer is resilient despite inflation pressures. We haven't seen material signs of customer trade-down yet, but we're prepared to capture that opportunity.

Q:Can you give color on the trajectory of lease write-offs expected through 2024?

A:We expect write-offs for the full year to be between 6% and 7%, in line with expectations.

Q:How is the Augusta, Georgia store performing relative to your expectations?

A:The store continues to ramp up and we're excited about the market and customer feedback.

Q:How should we think about personnel and other operating expenses going forward?

A:We expect a 50 to 100 basis point improvement in personnel as a percentage of revenue, but a 50 basis point increase in other OpEx due to advertising investments and new store opening costs.

Q:Review of Unclear Management Responses

A:Management avoided giving a direct answer regarding the specific number of stores they will ultimately close, stating only that they are continuing to optimize markets. Additionally, while they provided some insights into the health of the underlying consumer, the response lacked specific data or clarity on the extent of consumer trade-down.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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