The Aaron's Company, Inc.
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Good morning. Welcome to the Aaron's, Inc. Conference Call to discuss First Quarter 2018 Earnings. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Participating this morning are John Robinson, Aaron's, Inc. President and CEO; Ryan Woodley, CEO of Progressive Leasing; Douglas Lindsay, President of the Aaron's business; and Steve Michaels, Aaron's, Inc., CFO and President of Strategic Operations. Now, I would like to introduce Kelly Wall, Vice President of Finance, Investor Relations & Treasury. You may proceed.

[Kelly Wall:]

Thank you, and good morning, everyone. Welcome to our conference call to discuss Aaron's first quarter results which were released today. All related material, including Form 8-K, with the Q1 earnings release are available on the company's Investor Relations website, investor.aarons.com, and this webcast will be archived for replay there as well. Before the results are discussed, I'll remind investors about the Safe Harbor statement. Except for historical information, the matters discussed today are forward-looking statements. As such, they involve several risks and uncertainties which could cause actual results to differ materially from those predicted in Aaron's forward-looking statements. Please see our 10-K for the year ended December 31, 2017 and subsequent SEC filings for a description of certain risks that may cause actual results to differ. Forward-looking statements that may be discussed today include Aaron's and Progressive's projected results for future periods, Aaron's strategy and other matters including those listed in the forward-looking statement disclaimer in our earnings press release published today. Listeners are cautioned not to place undue emphasis on forward-looking statements, and we undertake no obligation to update any such statements. During the call, we will also be referring to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net earnings and non-GAAP EPS, 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 with our earnings release. I will now turn the call over to Aaron's CEO, John Robinson.

[John W. Robinson, III:]

Thanks, Kelly, and thank you for joining us today. We're off to a good start for the year. The teams at both Progressive and Aaron's are making great progress innovating our business to better serve our customers, as evidenced by our strong top line performance. We achieved 13% revenue growth in the first quarter with both Progressive and the Aaron's business exceeding our top line expectations. While lower year-over-year, profitability reflected expected higher operating expenses, which included strategic investments at both Progressive and the Aaron's business. We continue to have good visibility into our lease portfolios and are encouraged by key trends we are seeing across the business. As a result, we are reaffirming our financial guidance for the full year. Progressive had another quarter of outstanding execution, and together with the help of our retail partners achieved strong invoice and revenue growth. We're bullish about our pipeline and believe our existing and new retail partners can generate significant growth in 2018 and beyond. The team continues to make enhancements to the decisioning process and we believe we can drive more revenue for our retail partners and more profit dollars for Progressive as we bolster our market-leading position. The Aaron's business achieved an increase in lease revenue coupled with stronger lease margin in the quarter. We're making significant progress optimizing the existing model, and we're turning the tide on comparable store revenues. We have outstanding talent in the organization, and the results we are seeing from our transformation initiatives give us confidence to continue to invest in our omnichannel platform. Our balance sheet remains healthy with $189 million in cash and net debt to EBITDA of 0.5 times, which gives us flexibility to execute on our strategic priorities while continuing to return capital to shareholders, as we did again in the first quarter. Now, I'll turn it over to Ryan to discuss Progressive.

[Ryan K. Woodley:]

Thanks, John. We had a great start to 2018 with invoice volume, revenue, and EBITDA exceeding our expectations. Strong door growth and invoice per door drove a 33% gain in total revenue in the quarter to $487 million. The number of active doors increased 10% year-over-year and invoice per active door increased 20%. The continued strong growth in invoice per active door was driven by an increase in both the number of transactions per location as well as the average transaction size. We experienced growth across all of our key verticals with notable strength in jewelry, electronics, and appliances. Gross margin declined in Q1, driven primarily by higher 90-day buyout activity. While higher year-over-year, buyout rates remain within historical ranges. Operating expenses came in under plan for the quarter and reflect both investments to support our strong pipeline, as well as more normalized levels of write-offs and bad debt expense. At 6.1% and 9.6% of revenue respectively, write-offs and bad debt reflect expected shifts in the portfolio mix. We're pleased with this performance and expect to remain well within our targeted annual ranges of 5% to 7% for write-offs and 10% to 12% for bad debt. Overall, we're pleased with our continuing momentum in the first quarter. We came out of the gate strong and believe we are on track to achieve the annual revenue and EBITDA that we provided earlier this year. I'll now turn it over to Douglas for comments on the Aaron's business.

[Douglas A. Lindsay:]

Thanks, Ryan. We're pleased with our top line performance and the work the team is doing to strengthen our omnichannel platform. Total revenues decreased in the low-single digits, influenced by a decline in lower margin non-retail sales to our franchisees, which was driven primarily by our acquisitions of franchisees in the past several quarters. As John pointed out, lease revenues, which have a higher margin, increased year-over-year as revenue from store acquisitions offset the negative impact of store closures. Same-store revenues came in ahead of our expectations driven largely by higher average ticket size in the portfolio. We continue to see positive trends in our lease portfolio as a result of the great work by our merchandising, marketing, and operations teams. We've introduced more analytics into the optimization of our pricing and product assortment, and advertising is better aligned with our operational cadences and customer buying patterns. These improvements are driving an increase in our recurring revenue base. As noted in today's earnings guidance, we expect this trend to continue and believe this can support positive comparable store revenues in the fourth quarter of 2018. Lease margin also improved significantly in the quarter, driven by our focus on lower discounting and the shift to higher margin products. Write-offs increased slightly to 3.8% of revenue in the quarter, and operating expense increased in the quarter as we continue to make planned investments and business transformation, merchandising, analytics, and technology. As we've discussed, we have a number of initiatives underway in various stages of development. One of these initiatives is re-platforming our e-commerce site. The new platform launched on April 10th, and we're optimistic about the improvements we've made to increase product selection, enhance the search experience, and make it easier and faster for our customers to lease products on Aarons.com. I'm excited about the transformation that's underway and the talent that we've assembled. We remain focused on improving the Aaron's customer experience and driving future revenue growth while also lowering our cost to serve. We look forward to updating you on the progress of our other business transformation initiatives as the year goes on. I'll now turn it over to Steve for an update on the financials.

[Steven A. Michaels:]

Thanks, Douglas. Now, I'll turn to the financial details for the quarter. Revenues for the first quarter of 2018 were $954.8 million, up 13.1% over the same period a year ago. Net earnings for the quarter were down 2% to $52.2 million versus $53.3 million a year ago. Net earnings for the first quarter on a non-GAAP basis were up 1% to $58.3 million compared with $57.8 million for the same period in 2017. Earnings per share assuming dilution for the first three months ended March 31 were $0.73 compared with $0.74 for the same period in 2017, and diluted EPS on a non-GAAP basis for the quarter were up 1.5% to $0.81 in 2018 versus $0.80 in 2017. Adjusted EBITDA for the company was $94.1 million for the first quarter of this year compared to $109.4 million for the same period last year. At March 31, 2018, the company had $189.4 million of cash on hand compared with $51 million of cash at the end of 2017. Cash generated from operating activities was $196.6 million in the quarter versus $104.2 million in the year ago period. The primary driver of the increase was a net income tax refund of $75.4 million received in this year's first quarter. Our total debt was reduced $10.3 million during the quarter, and at the end of March, we had a net debt-to-capitalization of 8% and no outstanding balance on our $400 million revolving credit facility. The tax rate in the quarter was 21.7% versus 35.5% in the year ago quarter. During the quarter, we repurchased 391,325 shares of common stock for $18.4 million. We currently have authorization to purchase an additional $481.6 million of common stock. Consolidated customer count increased 8.6% to 1,721,000 at March 31, 2018, up from 1,584,000 a year ago. As noted in the earnings release, we are reaffirming our annual guidance for 2018. Based on Q1 results, we now expect annual comparable store revenues for the Aaron's business to be at the favorable end of the previously provided range of negative 4% to negative 1% with positive comps expected in the fourth quarter. Additionally, for the consolidated business, we expect the second quarter to have similar year-over-year growth as in Q1 with approximately flat year-over-year EBITDA. This implies significant EBITDA growth for the back half of the year, as we believe revenue growth from the increasing size and quality of our lease portfolios will outpace more moderate growth in operating expenses. While not in our formal guidance, I did want to update our outlook for free cash flow for 2018. Given the merchandising initiatives that Douglas mentioned earlier, we now expect free cash flow in the range of $250 million to $275 million for the year. With that, I'll turn it back over to John.

[John W. Robinson, III:]

Thank you, Steve. I want to close the call by thanking all of our associates, franchisees, and retail partners for your efforts to deliver the best value proposition to our customers. We appreciate your commitment and all you do to make Aaron's such a success. With that, I'll turn it to the operator for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. Your first question will come from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

[Bradley B. Thomas:]

Hi. Good morning, guys.

[Ryan K. Woodley:]

Good morning.

[Douglas A. Lindsay:]

Good morning.

[John W. Robinson, III:]

Good morning.

[Bradley B. Thomas:]

I wanted to ask about expenses, and I think there will probably be other questions about that here, but maybe if I could just zoom in on the Progressive side of the business. Clearly, things are going very well on the revenue side of the equation, and you're having to grow expenses as revenue base grows and as you invest to drive future revenue growth. But I guess I was hoping you could just help us understand how much you're spending in terms of the day-to-day operations versus the investments and growth on the Progressive side, just given this is, I think, the first quarter we've seen, where the EBITDA dollars have been down year-over-year for this segment.

[Ryan K. Woodley:]

Yeah. I'm happy to do that, Brad. And I'll – appreciate the question. I'll try and provide a broad answer on margin generally because I know there are questions out there. And as you saw in the prepared remarks, we reiterated the outlook for the year, which obviously implies we expect to end in the annual range we've provided before. There's a few key components there that I'll talk through. Obviously, gross margin is one. SG&A and then two is another – and then the two lease performance metrics, but that explains some write-offs would be other one. I mentioned in the prepared remarks, gross margin is down primarily due to a slightly higher 90-day buyout level. That metric as you know varies from time to time and it's seasonally high in Q1. Buyouts were higher in the quarter than last year, but remained within the historical ranges we're seeing. Nevertheless, that impacted the year-over-year compare. We beat SG&A relative to plan that it was up a bit year-over-year. As we talked in the past, we can obviously drive more leverage here if we chose not to invest in some of the initiatives that we're working on to drive future growth. And initiatives internally that will allow us to drive further operating efficiency, but we felt it's a prudent thing to do as a very large unserved market out there and we want to continue to be the best positioned competitor out there to capture it. The final factor, which influenced about 220 basis points of the decline year-over-year in EBITDA margin is bad debt expense and write-offs, which we said previously on the last call, we expect it to be higher, primarily as a result of the expect to shift in invoice and the further optimize decisioning that we're making. And I also mentioned with those – with respect to those two metrics, we kind of reiterated that we intend to stay within the parameters we've previously provided, bad debt being 10% to 12% of revenue and write-offs being 5% to 7% of revenue. It's lesser comment on where we ended up in Q1 of 2018 and more a commentary on how exceptional levels were in Q1 of 2017. And bad debt expense this quarter was 9.6% of revenue compared to 8.7% last year. Both are low. 8.7% was exceptionally low. Coincidentally, if you go back and look at the last five Q1 periods, in three of those five periods, we were at 9.6% of revenue, exactly what we delivered in Q1 of this year. So, we're pleased with the 9.6%. It keeps us on track to deliver well within the annual range we provided of 10% to 12%. And write-offs is a similar story. Write-offs were at 6.1% of revenue in the quarter versus 4.8% last year. Both are good metrics. Both are good numbers. 4.8% was an exceptionally low level. In fact, if you do the same compare and you look back at the last five Q1 periods, 6.1% is the next lowest level in the last five Q1 periods. The only exception would be Q1 of 2017. So, you asked the question, well, why was it that low last year. The reality is we benefited from an invoice mix that had lower levels of bad debt expense and write-offs and perhaps tighter decisioning than we would have liked to have in retrospect. And by hovering around the low end of those ranges, I think we said when we provided the outlook on the last call, we feel like we're leaving a bit of money on the table, and our ongoing strategy with decisioning is to capture more of that opportunity while still delivering EBITDA in the range that we've previously provided of 11% to 13%. So, that's a bit of a long-winded answer, I know, but an attempt to give a pretty fulsome answer on Progressive's margin.

[Bradley B. Thomas:]

That's helpful. And I guess to follow up, Ryan, on the Progressive side, we've come across – there's a pilot with JCPenney out there, and it sounds like JCPenney is strongly considering a second half rollout that they're talking about. I guess to ask you the question, is a national rollout with JCPenney factored into your guidance at this time?

[Ryan K. Woodley:]

I appreciate the question. I won't answer specifically about any one retailer, as you know. I will reiterate a comment we've made in the past. As we sit here today, we're extremely happy with the shape of the pipeline. The benefit we've seen from pipeline conversions leading up to this point and new additions to the pipeline, they're all very strong and positive and leave us feeling optimistic. That's obviously what's embedded in our revised outlook for the year, which implies very strong growth as you know. It's not to say it's not competitive out there. I know we tend to get that question a lot, and there continues to be plenty of competition. There has been for some time now. I think they'll always continue to be. I think that's maybe an expression of the belief of others as well about how large the (53

[Bradley B. Thomas:]

Got you. Thanks, guys. I'll hand it over to others.

[John W. Robinson, III:]

Thanks, Brad.

[Operator:]

The next question will come from John Baugh of Stifel. Please go ahead.

[John Allen Baugh:]

Thank you. Good morning, all. Maybe I'll start out with a question for Doug. You referenced improved lease margins, I believe, in the core business. Any detail on kind of what that was, what you're doing that's driving that? And obviously, your numbers are a compilation of agreements you've written over some period of time. I'm curious as to how, say, throughout 2018 that lease margin looks like it will trend given what you've written in prior quarters or this past quarter or whatever.

[Douglas A. Lindsay:]

Yeah. Thanks for asking the question. Yeah, I'd say broadly we're getting traction from a lot of the things we talked about last year. Our merchandising team has done an awesome job delivering broader assortment. We have pursued this trade-up strategy which has led to higher ticket items and all that. And then these promotional strategies that we put forward have really boosted the ticket that we're putting into our portfolio. And so, as we're putting higher ticket into the portfolio and churning out lower ticket items, we're seeing better health in our recurring revenue streams. A lot of the margin increase we've seen is merchandising as well as a better handle on our promotional strategy, giving away less discounting and really finding items to present to the consumer that are higher margin items. So, that team has done a great job. This portfolio nature of the business gives us a lot of visibility going forward. So, as we look at the next few quarters, we see we're putting in more higher value leases into the portfolio and churning out lower value leases. And so, because of the length of the leases we have, we have really good visibility into our recurring revenue stream. We're collecting at a higher rate than we have in the past. So, this recurring revenue stream is even healthier than before from a collection standpoint. And so, if we continue to remain consistent on our operating expenses, we get good flow through to margin and we believe that's good for the business, and that's why we're reaffirming guidance. And as you've seen from our comp store guidance, we're pointing to the higher end of the range.

[John Allen Baugh:]

Okay. So, lease margin will be an, I guess, EBIT, everything being equal, helper as we go through the year. It sounded like it was a helper in the first quarter, and yet of course, the EBIT margins were down and you cite these investments. How do we think about – and I think you mentioned as the revenue builds in the core through the year, are we at the level annualized where expenses are going to be in the core for the year? Do they – I mean, personnel, I would imagine stays constant, if not goes up, but maybe it goes up last year-over-year because of timing of when you made investments. I'm just trying to get a sense of what the investment, their expense numbers do, and how the gross margin offsets as we go through the year?

[Douglas A. Lindsay:]

Sure. Yeah. I mean, if you look at our OpEx, we are up year-over-year. A lot of that has to do with acquisitions we made last year and these investments and business transformation. We see Q1 being a number that we would hold steady or be fairly normalized over the course of the year, and we don't expect any significant increases from those levels. We see, as we build the lease portfolio, which again we're getting better visibility into and putting higher value leases into, we see margin expansion over the course of the year and getting leverage on that OpEx.

[John Allen Baugh:]

Okay. And I believe Steve referenced improvement or change, I guess, in inventories as it relates to the core. Could you describe what's going on there and discuss numbers?

[Douglas A. Lindsay:]

Yeah. I believe he was speaking to the benefit we're getting from merchandising in our cash flow – merchandising team. One of our initiatives this year is just to drive down the cost of the product we sell, and they've done a great job of effectively talking to our vendors and comparing vendors and getting the best pricing we can on our inventories. So, as we begin to buy product over the course of the year, we should enjoy the benefit of those purchasing efficiencies.

[John Allen Baugh:]

Okay. And my last question, I guess, is for you, Ryan. The 90 days, was there anything in there when you look at it year-over-year in the first quarter? And then, I guess, more importantly, as you look out to the balance of 2018, is there anything going on there with retail partner mix or vertical mix that will be explaining that? Or if not, what do we read into the fact that 90 days are up slightly?

[Ryan K. Woodley:]

Yeah. Good question, John, on 90 days. The take rate on 90 days is influenced by a lot of variables as you might imagine, seasonality, pricing, customer behavior, invoice mix, which includes retail (25

[John Allen Baugh:]

Are we still in the same ranges? Roughly, I believe, it was 30% to 35%, execute 90 days, is that still within that boundary?

[Ryan K. Woodley:]

Yeah. On the lease pool – our lease pool, that's roughly in the range. I don't have the number in front of me. And obviously what influences financials is that those accounts that choose to do it in the period rather than origination pool base calc, but that's roughly right for origination pool.

[John Allen Baugh:]

Okay. Thanks. Good luck.

[Ryan K. Woodley:]

Thank you.

[Operator:]

The next question will be from Budd Bugatch of Raymond James. Please go ahead.

[Beryl Bugatch:]

Good morning. Thank you for taking my question. Congratulations on the revenue growth.

[Ryan K. Woodley:]

Hi, Budd.

[Beryl Bugatch:]

I guess – thank you. I'd like to concentrate on the expense growth. You talk about new initiatives. Can you give us a little bit more color in each of the segments about those initiatives? Are they people related? Are they facility related or both, or can you maybe give us a little bit of a distinction as to which segment might have grown faster? I think the – like $67 million worth of growth and 18%, almost 19% year-over-year growth.

[Steven A. Michaels:]

Hey, Budd. This is Steve. I'll start and just a reminder, we'll be filing a 10-Q this afternoon right at 4

[Douglas A. Lindsay:]

Yeah. So, on the Aaron's side of the business, we've been investing beginning of the third quarter last year and what we're calling business transformation and that's got many tentacles to it, but one of the biggest pieces of the investment are analytics and merchandising teams, and we believe we're seeing the return on that in which you're seeing in our revenue side of the business and our comp guidance. So, we're really happy about that. There's a lot of details behind that, but these guys are driving ticket and also driving some of the trend in the right direction on customer traffic. We also launched in April 10th our new e-comm site and that took a lot of upfront investment as far as technology and people and brining in the right resources to do that. So, we're super optimistic about that. That business has been growing and accelerating the pace of growth into the first quarter. And then lastly, we're testing a lot of other traffic driving concepts and operating efficiency concepts. Many of those are in their infancy, including some investment in call centers and including investment in in-store technology, and all of those things we're testing and learning from. Some of the early tests are positive and we're trying to replicate the result of those, and we'll update you more on those in the future quarters.

[Beryl Bugatch:]

Ryan, anything on Progressive?

[Ryan K. Woodley:]

Yeah. Sure. Third question, because we did talk about investment a lot ahead of the growth and out of the growth, the business is delivering. It requires ongoing (30

[Beryl Bugatch:]

I understand the growth to support existing retailers. Can you maybe give us any color on how much of the OpEx growth might have been to support retailers you don't have yet?

[Ryan K. Woodley:]

Great question. I don't know off the top of my head if I could come up with a good breakdown, but as you might imagine, the way we invest in a new opportunity is certainly front loaded. So, it's primarily people and programs on that front. Obviously, anything we do to get an account up and running our front lines revenue – front lines invoice volume. So, we're investing a lot in people and programs. Think of training and programs to ramp our retailer before we even do our first lease with them. And so that's certainly a factor that bleeds through, a fair question. I just don't happen to have top of mind what that breakdown would be.

[Beryl Bugatch:]

Okay. And last for me. Invoice per active door, I think, was up 20%. Can you characterize where that came from? How much of it might have been jewelry related with Signet, or where that might have been concentrated if it were?

[Ryan K. Woodley:]

Yeah. Good question. Certainly happy with how both new and existing doors are performing. Obviously, the new doors were benefiting from some maturation in those doors. We haven't quite cycled the introduction of some of those bigger accounts that we've talked about in the past. Certainly, it's continuing to benefit from the increasing productivity out of those doors, which is also a big help. And as you look at the components for that invoice per door, it really increases in both the number of transactions as well as the size of those transactions going through and mix is a factor certainly in doing that. The team spends a lot of time motivating retail sales associates to get better at completing the Progressive transaction, and a lot of that effort behind the scenes drives what you're seeing in increases here.

[Beryl Bugatch:]

Thank you very much. I'll cede the floor to others.

[Ryan K. Woodley:]

Thanks.

[Douglas A. Lindsay:]

Thanks, Budd.

[Operator:]

The next question will come from Bill Chappell of SunTrust. Please go ahead.

[William B. Chappell:]

Thanks. Good morning.

[Ryan K. Woodley:]

Good morning.

[Douglas A. Lindsay:]

Good morning, Bill.

[William B. Chappell:]

Just want to follow-up on Budd's question. I mean, I notice that it was a higher average ticket both at Progressive and in the Aaron's stores. Was there anything going on with the consumer or were you just seeing overall a little more healthier? And how does that look as we move into second quarter with tax returns and stuff?

[John W. Robinson, III:]

Hey, Bill. It's John. Thank you for the question. I would say the higher ticket in both businesses from our perspective is largely driven by company specific activities. So, specific strategies were – have developed to drive higher ticket in their specific strategies in each business which have done that, and I think that from our perspective will be the reason for the increase. From a health of a consumer perspective, we talked about this all the time, it's hard for us to see a big change there. Tax season seems very – fairly normal for us this year. There's a few puts and takes with a little bit higher 90 day, as Ryan mentioned. But there's other metrics that could point in another direction. And so, generally, we feel like there has been this tax reform. We haven't necessarily seen that flow through to our consumer, but we haven't seen our consumer get worse from any perspective either. So, we feel like the changes that have happened in our P&L and the changes that have happened to our ticket, we feel like are related directly to company-specific strategies that we've been proactive about initiating this last quarter and in the prior quarters.

[William B. Chappell:]

Got it. And I guess kind of tying into that, just trying to understand the core Aaron's business. And I think the way it was laid out was it was really going to start to rebound more as we move to the third and fourth quarter, but it sounds like it's moving ahead of schedule. And maybe, Douglas, if you could talk a little bit about it, if it is moving ahead of schedule. And then, I know this is you don't sell clothes or other weather-related stuff, but it was a pretty odd quarter in terms of weather. Did that have any impact? And I mean, the numbers were pretty strong regardless.

[Douglas A. Lindsay:]

Yeah. I mean, listen, there was weather in the Northeast. There was weather in a lot of places, but the quarter was kind of as expected from customer traffic perspective. Our customer traffic is still down, but the rate of decline is declining. So, we're happy about that. I think the big story is the merchandising strategy and the ticket we've been able to drive. You're right, we're seeing more traction than we expected. And I think the levers that that team is pulling do not necessarily raise price, but reposition our inventory to the customer, and the customer is buying at the same rate they have before but just higher ticket items, so we're pleased with the results there.

[John W. Robinson, III:]

And I just want to clarify, when he says customer traffic trends are – they are negative, but they're improving. So, he said declining, which is technically correct. I just wanted to make sure it's clear that we see those trends getting better. And as Douglas mentioned, there were a number of initiatives we have underway directly targeting and driving traffic, and we're seeing – and when we talk about the e-comm site, there's a number of other projects underway inside the Aaron's business focused directly on that, which we're seeing good results at small scale, and we're refining and working toward rolling out on a larger scale, but we're still in the early stages of those. But want to be clear, that's one of the reasons we talk about our optimism in the business. In addition to this higher average ticket, which Douglas has worked hard on over the last two years to drive higher, and we're seeing great success there, we're also seeing rays of light which give us good optimism around driving traffic in the future. And as Ryan said, it's a big market with a lot of potential customers, about a third of the population, and we feel like between the two models we're innovating in the right ways to capture more and more of those customers.

[William B. Chappell:]

Got it. And then last one for me. I realize you have your own local fleets, but do higher freight rates have any impact in terms of getting product around the country?

[Douglas A. Lindsay:]

Yeah. I mean, absolutely. We move product every day. We have our own fulfillment centers and we use outside shippers, so shortage in drivers and increases in fuel costs absolutely affect us. And we've seen a little bit of that in the first quarter and we continue to monitor it as we go into the year, but all of that is baked into our guidance.

[John W. Robinson, III:]

And that's another area, Bill, where we're focusing in the future on getting more efficient. We have a good supply chain that was really customized for this business. And as we change the business, as more becomes e-comm driven, and as we change our footprint stores, over time, we expect to continue to optimize and innovate our supply chain so that we're more efficient, and that's certainly one of the areas we're focusing on right now. But it's not a probably a 2018 return, but there's certainly a lot of work going on there. And as Douglas said, all the investment we're making there is baked into our guidance that we've given already for 2018.

[William B. Chappell:]

That's great. Thanks so much.

[John W. Robinson, III:]

Thank you.

[Operator:]

The next question will be from Anthony Chukumba of Loop Capital. Please go ahead.

[Anthony Chukumba:]

Good morning. I have two questions. So, the first question, and I just want to make – it's more clarification than anything else. The Progressive doors were up 10% year-over-year to 20,000. If I recall correctly, when you reported your fourth quarter results, you also gave that same number for active Progressive doors. So that would imply that Progressive doors were essentially flat sequentially between the fourth quarter and the first quarter. I just wanted to confirm that.

[Ryan K. Woodley:]

Yeah. Anthony, Ryan here. We're rounding a little bit when we give you that stat, but it was a little higher in Q1 than it was in Q4, which wouldn't be anomalous just given the volume of retail activity in Q4. We tend to see that similar trend play out year after year.

[Anthony Chukumba:]

Got it. So, it was higher. Okay. So, it grew a little bit sequentially.

[Ryan K. Woodley:]

Yes, correct. Yeah.

[Anthony Chukumba:]

Okay. Got it. That's helpful.

[John W. Robinson, III:]

But you also see more activity in the fourth quarter on a seasonal basis. So, often times, there are doors that will do a deal in the fourth quarter that may not do a deal in the first quarter within the same retailer.

[Ryan K. Woodley:]

It just so happens that we're growing so quickly that we actually exceeded the active door count in Q1 over Q4, but that's only because of the high rate of growth.

[Anthony Chukumba:]

Got it. So, I'm assuming based on your answer to the question, there's some sort of minimum threshold of transactions to be counted as an active door, and essentially what you are saying is there might have been some active doors in the fourth quarter because of Christmas that were not active doors in the first quarter. Is that a fair assessment?

[Ryan K. Woodley:]

Correct. The threshold is a single lease transaction in a door to be counted as an active door and that's how we build the count.

[Anthony Chukumba:]

Got it. Okay. That's helpful. And then my second question, so clearly, you're seeing some improvements in the Aaron's business in terms of, as you mentioned, the customer traffic improving, in terms of your clients getting smaller, and in terms of the average ticket size increased as well, and I was just wondering how much of that – if any of that is attributable to the sharing of best practices from the SEI acquisition last year?

[Douglas A. Lindsay:]

I would say most of the revenue or portfolio increase right now is coming from ticket. As I mentioned, traffic is still down but improving. And so, I think that ticket is really coming from processes we put in place with our merchandising team and becoming a little bit more centralized in the way we go about things at Aaron's. There is more decentralization, I would say, in the past of operating practices. And we've really centralized those operating practices and our inventory techniques and our product positioning. And that we've really gotten benefits from that. So, I think what you'll see if you go into the Aaron's stores a great deal more consistency than in the past in pricing and product and in the operating practices. Some of the practices that were brought over from SEI have been embedded into that, and we continue to sort of pick and choose the best practices from all different – of our operating divisions and that's implemented (42

[Anthony Chukumba:]

Got it. That's helpful. Okay. Those are all my questions. Thank you.

[Ryan K. Woodley:]

Thanks.

[Douglas A. Lindsay:]

Thank you.

[Operator:]

The next question will be from Kyle Joseph of Jefferies. Please go ahead.

[Kyle Joseph:]

Hey. Good morning, guys. Thanks for taking my questions. Most of them have been answered. I'll ask one more on expenses if you don't mind. Steve, appreciate the color you gave on a little bit of the seasonality, but just from a longer term perspective modeling the business, or are you guys seeing any shifts in the seasonality of expenses or is this kind of more of a just a one-time thing for 2018?

[Steven A. Michaels:]

I don't think we're seeing shifts in the seasonality. There are some normal timing things where in one year we may do some marketing in Q1 that we didn't do last year and that's going to just – we're going to depend on how we want to execute our plan. So, just – and on the Progressive side, with the growth that they're having is just going to be a continual ramp even though we are going to see leverage on the SG&A side. So, I don't think for modeling purpose we're seeing like any permanent shifts in the expense growth.

[John W. Robinson, III:]

No. I mean – one thing I'd add to that is, obviously – I mean, just kind of reiterating, but on the Progressive side, you can't decide when you're going to roll out with a retail partner. They decide that for you. And so, the ramp of expenses related to rollouts, particularly of national programs are somewhat unpredictable, and we try to give visibility on that on an annual basis, but it's hard because you don't have complete visibility and we have to be reactive to their schedule in many cases. So, that it's something that we can't – we don't have a lot of predictability around that. In the Aaron's business, we have these investments we're making and we're constantly trying new things, testing new things, and as things work and we scale, we may accelerate expenses from time to time. We try to get some visibility on that in our calls, but that is something that we'd just put out there that as we move forward and we have good luck on things that's small scale, we may choose to scale more aggressively. And that's not necessarily seasonal at all. That's just more based on the innovation work we're doing right now.

[Kyle Joseph:]

Appreciate that. That's very helpful. And then in terms of the strong cash flows that Steve mentioned for this year, I think it'd be helpful just to – if you guys could refresh us on your capital allocation strategy, I know you guys bought back some stock in the quarter, but in terms of your balance, repurchases, dividends and/or acquisitions?

[John W. Robinson, III:]

Yeah. So, we're pleased with the cash flow generation of business. One thing about Progressive is so great from a business model perspective is that despite its growth, it still generates cash at these levels and so really pleased. And the Aaron's business is obviously also generating cash. So, we're very pleased that that's the case. We've talked about in the past a lot, but the first and foremost, we want to maintain a conservative capital structure. We think it gives us the flexibility to grow with large retail partners on the Progressive side, and it gives us the ability to innovate on the Aaron's side to make investments that are necessary to adjust our model to be the market leaders we've been in the past. And so, we're going to maintain a conservative capital structure in the absence of any significant acquisition, which we're always out there looking for businesses that can augment our technology or processes, our product, things that are different that could really add to the business, similar to the Progressive acquisition that Aaron's made in 2014. So, we're always looking for that. We have a team. Part of Steve's job is to have a team that's full time, looking at ways to deploy our capital strategically from an M&A perspective. Beyond that and maintaining backdrop of a conservative capital structure, we'll continue to return capital to shareholders through dividends and buybacks. We bought stock back in the first quarter, and we expect to continue to do that in the future, but it'll be a function of the other activities from a strategic standpoint and maintaining a conservative balance sheet. We'll kind of keep that framework in place going forward.

[Kyle Joseph:]

Got it. Thanks. And then one last one, and apologies if I missed this, the tax rate was a little bit lower than you guys talked about on the prior call. Any change to that outlook?

[Steven A. Michaels:]

No. I mean, you're right. It came in at 21.7% for the quarter. We still think it's going to be in the neighborhood of 24% for the year. So, I think we said 24% to 24.5% previously. So, maybe closer to 24% for the year.

[Kyle Joseph:]

All right. That's helpful. Thanks a lot for answering my questions.

[John W. Robinson, III:]

Thank you, Kyle.

[Steven A. Michaels:]

Thank you.

[Operator:]

The next question will come from Vincent Caintic of Stephens. Please go ahead.

[Vincent Caintic:]

Thanks. Good morning, guys. My quarterly questions have been asked, so maybe I'll ask some more broad questions. On the retail side and so specific to actually to Progressive, so on the retail side, we've been hearing mix trends in terms of retailer same-store sales. I'm wondering on maybe the cautious side if there's any particular areas where you might see some concern from your retail partners, but on the positive side, how – maybe are you seeing engagement with your existing retail base and maybe the pipeline from new retailers looking to get more sales?

[Douglas A. Lindsay:]

Appreciate the question, Vincent. We've got a large base. So, 20,000 active locations covers literally thousands of relationships with different retailers. So, of course, in that basket we see some folks that are doing better than the others. I think what helps Progressive in that instance is that maybe without exception, they're looking to us as one of the key arrows in the quiver to drive positive comps. So, if you think about even those retailers that may not be doing as well as they hope, they're focusing on how they can better execute the Progressive program to support their comps. So, that's what we see across the business and we're very pleased with where same-store comps are for us across the portfolio. That's not to say that it's positive in every single instance across the thousands that we work with, but it's to say that that is a fair characterization of what we see across the portfolio, and I think that's the key driver. Obviously, we've got a big team working really hard to support those retailers and drive those comps. But I think they're looking to us as one of the key initiatives that will help support and improve sales.

[John W. Robinson, III:]

And one thing, Vincent, I'll add – this is John – to that is, one thing we've seen historically with Progressive over time is that the same door trends with Progressive aren't always the same as the retailers' trend as Ryan mentioned. And one of the reasons is we continue to innovate the product. So, part of the – we talked about investment in the business. Part of the investment is continually making the product better, easier and faster at the point of sale for the retailer, easier and better for the customer, and that in itself drives a lot of same-door productivity, and the team has done an amazing job of that over the last few years. And we're seeing the results of that. And also, as Ryan mentioned, we spend a lot of time motivating and training our partner sales associates. And so we've gotten a lot better at that. We've built out more infrastructure around that. We've applied more technology, more know-how of that. And all those things together, that's some of the investment that we don't talk about enough, but is one of the big differentiating factors of Progressive for retail partners, and it's one of the big reasons we continue to drive more productivity in doors. And with that goes the decisioning as well. So, we've gotten better in all of the key pieces of the business and we continue to do that. And as we've said, we're not harvesting the business. We're investing ahead of where the business is today so that we maintain our competitive position, get better and better and better, and that's what's been driving a lot of this. And Ryan has mentioned a lot of that over the time, but I just want to make sure we talk about that because that's what's happened and that's why we think we've had such success, and we'll continue to have success, is getting the right people doing the right things and making these investments.

[Vincent Caintic:]

Perfect. That's really helpful. Just last question and switching sides, on the consumer front, you spoke about still seeing a healthy consumer. Are you seeing any behavioral changes at all? I know on the – so on the Progressive side, maybe 90 days, same as cash (51

[Steven A. Michaels:]

I mean, I don't think – I think the answer to that is – as I said earlier, I don't think it's anything that we can see from a macro perspective. It's more specific strategies that we have put in place in the Aaron's business. If you look forward and think of the tax reform that's happened, that can help our customer over time for sure, Vincent. And to the extent interest rates rise and there's tightening in the credit markets generally, that typically can flow down to our customer over time, and that can be a tailwind for us. It's something we've been through a period of expansion as you know and very, very low rates – low cost to capital, and so, a lot of options. And if that tightens, we could expect that to cause a tailwind, but we haven't actually seen that yet, but we're hopeful that it could happen in the future as a driver of our demand.

[Vincent Caintic:]

Perfect. Thanks very much.

[Steven A. Michaels:]

Thank you.

[Douglas A. Lindsay:]

Thank you, Vincent.

[Operator:]

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to John Robinson for his closing remarks.

[John W. Robinson, III:]

Thank you very much for participating in the call. We look forward to updating you on our Q2 results. Thank you.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.